The whole idea of process management is; the chain of actions to be made effective and efficient.
—Hans van Krevel
In any type of business, there will be numerous processes to manage to ensure efficient running, some of these areas will be relevant from the beginning, others may become important as the business grows, and some may be important depending on the size and type of business. Whatever the circumstances, there are numerous important areas that will need consideration and research as you embark on your entrepreneurial journey.
Taxation
In the early stages of setting up, running, or establishing your business, you may consider seeking the advice of an accountant or tax adviser (this is usually a good idea, particularly if the domestic tax rules or the tax rules with countries you trade with are complex). You can then obtain professional advice on your tax position to ensure you pay your relevant and correct tax obligations on time. While this type of specialist support will come at a monetary cost, it pays to start this process properly. And unless you are a trained accountant, it may well be both more time and cost efficient to have this type of support from the beginning as any mistakes or miscalculations can be potentially costly and problematic.
As an entrepreneur, it is your responsibility to be aware of the tax implications, together with any changes, for your business.
Income Tax
Everyone pays income tax. If you are a sole trader and self-employed, you may well carry out a tax self-assessment. If you have set up a company (which as mentioned in Chapter 2 is a separate legal entity), you will be an employee of your company, so your income tax will be collected via the PAYE system.
If you are self-employed, income tax is payable on the profits of your business. This is because it is taken as personal income as there is no legal separation of your personal and business income. However, as the profit or loss for your business activities cannot be predicted, the income tax is due retrospectively, in almost all cases as a single payment.
In the United States as in the United Kingdom, income is taxed by Federal/Central Government. In the United States, state and local governments are also involved. Both tax systems are progressive, so the rate of taxation increases as income increases.
However, if your business is a limited company, you are likely to draw a salary which means the tax authorities consider you as an employee of the business. You may decide not to draw a salary, instead you may pay yourself a dividend at the end of your financial year. Either way, you have an income tax liability if your total income exceeds your current personal allowances (i.e., the amount you can earn tax free).
Corporation Tax
This is the tax your company pays on its profits. Generally, your business decides how much corporation tax it owes and is calculated via a self-assessment process. This tax is calculated at the end of every financial year and must be paid within the stated timescales to the tax authorities in the United States to the Internal Revenue Service (IRS) and in the United Kingdom to Her Majesty’s Revenue and Customs (HMRC).
Corporation tax is imposed in the United States at the federal, most state, and many local levels on the declared income of all businesses.
All bills, invoices, and receipts must be kept for five years after submitting a corporation tax return, so that you can verify, and figures should the tax authorities decide to seek clarity.
You can normally claim for a range of business expenses, and these can include the following:
• All costs incurred for the sole purpose of generating business profits
• The cost of goods for resale and the costs of raw materials
• Wages and salaries, employer’s National Insurance (NI) contributions (see below), insurance costs, and pension benefits
• Costs relating to your dedicated business premises, for example, heating lighting, water rates, and business rates. If you work from home, then a quantity of these costs can be claimed
• General maintenance of your business premises (again a proportion if you work from home) and repairs to any business equipment
• Telephone/mobile bills (those calls exclusively for business purposes), postage, stationary, printing, and software
• The running costs of your own vehicle that are attributable to your business. This will include insurance, servicing, repairs, tax, and fuel
• Travel and accommodation on business trips
• Accountant’s fees and possibly solicitor’s fees
• Special clothing that is exclusively for work purposes
As ever, seeking the advice of an accountant or the tax authorities is certainly worth doing and will be invaluable.
National Insurance (NI)
In the United Kingdom, everyone pays NI. There are different rates for employees and the self-employed. If you become an employer (see later in this chapter), you have the responsibility to collect and pay the NI for your employees. The self-employed do this themselves.
Currently, there are four categories of NI.
Class 1: This is where employers pay NI contributions for most of their employees, including directors, part-timers, and contract workers. There are a few exceptions: for example, employees who are under 16 or those who earn below a certain threshold.
Class 2: This applies if you are self-employed although you can be exempt if you are making below the current threshold.
Class 3: This is a voluntary rate paid by individuals who want to fill any gaps in their contributions record.
Class 4: As with Class 2, this applies if you are self-employed and it levied on your annual profits. This tax is collected concurrently with your income tax.
In the United States, there is provision for health insurance, which offers a range of options that help pay for medical expenses, whether privately purchased or obtained via social insurance or a government-funded social welfare program.
Value-Added Tax (VAT)
Legally, if you have set up as a company in the United Kingdom, when your annual sales reach the threshold specified by the tax authorities, you are obliged to register for VAT. This tax is usually payable on your sales, so it needs to be added to your invoices. However, you can claim back or offset the VAT on items you purchase for your business.
You can voluntarily register for VAT if you feel it is feasible to do so, that is, the advantages (your ability to recover VAT) against the disadvantages (the need to charge VAT and the additional process costs).
Today, there are several software packages available that will self-generate your VAT and other tax returns. However, it is always important to retain the supporting documentation/records should the tax authorities request sight.
In the United States, there is a system of sales tax that is levied at the state rather than federal level. Most states opt to charge a sales tax although there are considerable variances. However, sales tax is currently not added onto goods and services that are exported from the United States to the United Kingdom.
Capital Gains Tax (CGT)
If you sell something for more than you paid for it, you may be liable for CGT, for example, if you sell a property or another type of investment as an integral aspect of your business activities.
In the United States, short-term capital gains are taxed at the same rate as tax on ordinary income. Long-term capital gains are currently taxed at lower rates.
Minimizing Your Taxable Profits
There are several ways for you to reduce your tax liability. (It always needs to be done in an acceptable and legal way.) If in doubt, seek advice from your accountant or the tax authorities.
Options include:
• If your spouse works with you, they are paid for the work that they undertake.
• If you are self-employed and make a loss in your first year, you can offset that against income from previous years. In these circumstances, you may be entitled to a tax rebate.
• Any self-employed trading losses in any year can be carried forward to offset against future profits from the same trade.
• If you are self-employed, you can also set off any losses against other income received in the same tax year, for example, from private investments.
• If you are set up as a limited company, any trading losses can be offset against other income in the same tax year.
• Payments into a pension scheme can be offset against taxable profits. However, remember that pension contributions are usually inaccessible, so would not be available for use in your business in case of need.
• Log all your allowable expenses. The golden rule is that business costs are allowable, personal costs are not.
• Ensure you claim all the available capital allowances. For example, if you are purchasing office goods, in this case, you can write off a percentage of the value of these assets against profits over several years.
Becoming an Employer
As your business evolves and hopefully goes from strength to strength, maybe sooner rather than later, you may need some external help and may look to take on new employees. In fact, in some cases, you may be working with others from Day 1.
Your primary options are likely to be employing someone or outsourcing a part of your activities to a contractor or to another company.
Employing someone obviously costs money; however, you should regard this eventuality as a key investment from your business. However, you must remember, when you employ someone, you have a series of very important legal obligations, for example, taxation and working conditions.
Recruitment
There are so many exciting times when starting your own business, with a considerable range of things to think about. In the early phases, you may be working alone as you look to get established. However, at some stage, possibly from the outset, you may need to have support from others.
Recruiting may be a new experience for you, so here are several issues you need to consider:
• Do you need to recruit? Is it essential? Can your business support it and are you truly ready to be an employer?
• Why do you want to recruit? Your rationale needs to be crystal clear with a specific need and purpose.
• What will be the job content? What will be involved, in terms of the key roles and responsibilities? Is this clear from the outset?
• What terms and conditions will you offer? For example, full-time or part-time (see the following).
• What qualifications and experience will you expect your employee to bring and subsequently contribute to your business’s success? Be specific here and try as far as possible to stick to your criteria, even if that is the more time-consuming route. In most cases, it is better to wait for the right person than to rush and get someone who isn’t a great fit (a possible “lose lose” situation).
• How will your new employee integrate into your business? In the interests of team spirit and having a great workplace culture, as previously mentioned, getting the right person is paramount.
• The terms and conditions, including salary and any other reward and recognition, that are to be offered.
You have your own network of possible employees, which can also be effective.
Other possible avenues for finding potential employees include the following:
• Job centers, whose primary purpose is to get people into work
• Job seeker and recruitment sites, where you can place an advert on the site for a fee
• Recruitment agencies, which can be a considerable expense in your early days
• Recruitment advertising, largely via social media but can be via local newspapers
• Via your own advertising, website, or newsletter
• Using word of mouth or your own network
If and when you recruit, it is critical for your business that you make the right decision. It is essential that you recruit the right person, for the right reasons at the right time.
One major risk is if you recruit on gut feeling on instinct. This may work well because you will probably be working closely with your colleague, and you need to get on well with them. With that said, ultimately you need your employees to make an effective contribution to your business’s success. It is also worth noting that employees have rights, and if you make the wrong choice, you may end up having to make the best of it.
Types of Employees
Permanent employees: A full-time employee has a contract with you without a time limit on it, that is, open-ended. A full-time employee usually implies they will offer a normal working week (as defined and agreed in the contract of work).
Part-time employees: They also have an open-ended contract of employment, expect this will be for fewer hours or less days than a full-time employee. Again, the exact details will be clarified in the contract of work.
Fixed-term contracts: This would be where you take on an employee with a contractual arrangement that has a specific finish date (this may be a date or when a specific job, task, or defined time period has been completed).
NB: For both permanent and part-time employees, your employer obligations are the same, for example, in terms of pay and conditions, any benefits package and pension provisions.
Temporary employees: These employees would usually be supplied via an employment agency. Your contract, therefore, is with the employment agency rather than the employee.
Freelancers, consultants, and contractors: Each of these categories are self-employed, effectively independent businesses selling their skills and services to you. Any agreement between you and them is always best formalized, probably by a contract. This means you and they are clear about the terms and conditions services are to be provided. These types of employees are responsible for their own tax liabilities.
Your obligations for permanent employees include the following:
• Providing a written contract of employment
• Offer a minimum level of paid holiday and a maximum working week (as specified in the contract of employment)
• Paying your employees at least the minimum wage (e.g., set by the U.S. labor law and a range of state and local laws or in the United Kingdom by Central Government)
• Provide an itemized pay statement
• Registering all employees with the tax authorities (in the United States by the IRS and in the United Kingdom via the HMRC)
• Provide a safe and secure working environment
• Taking out the appropriate insurance cover to protect all parties (including you) against claims for illness or injury
• Possibly offer statutory sick pay. The specifics of your obligations will vary from country to county. For example, in the United States, there is no national requirement to offer paid sick leave, although many states have their own laws
• Treating all your employees fairly, avoiding discrimination
• Following the correct procedures if there was a need to dismiss an employee or make them redundant
Paying Your Employees
All employees aged 18 or over are legally entitled to be paid at least the minimum wage (as mentioned earlier).
The different options to pay employees include the following:
• Salary: This is where your employee(s) are on a fixed salary where a specific annual figure is earned. Payment frequencies are usually monthly or weekly. The figure paid to your employee will normally be net of any tax and, if appropriate (dependent on local country legislation), insurance.
• Hourly rate: Here, your employees will receive a specific amount (pretax) for each hour of work. The number of hours may be specified by contractual arrangement, and often, there is a minimum expectation for hours worked. Overtime rates may apply if you ask your employee to work additional hours. From your perspective, this approach has the advantage of you only paying your employees for the hours required. Your employees may feel this option gives them greater flexibility although possibly less job security.
• Commission: This scheme means your employee is paid solely on performance or output/productivity, for example, an agreed percentage per sale, or payment upon meeting an agreed target. The benefit of this approach for you is that your employees are paid (therefore incentivized) by results. So, you and they benefit if targets are met or even better, exceeded. However, from your employee’s view, there is inevitable uncertainty about whether they will do enough to achieve their targets. Their ability to do so may well be influenced by a range of factors outside their control.
The Tax Position of Your Employees
When you take on an employee, you have legal obligations requiring their income text and possibly (depending on your global location) NI contributions.
An employee:
• Is Anyone you employ under a contract of service, whether explicit (documented) or clearly implied
• Included here are directors, business partners, part-time employees, or casual workers
NB: An employee usually doesn’t include those who are self-employed. In the event of doubt, clarity can be obtained from the tax authorities. This will be, for example, the Internal Revenue Service in the United States and the HMRC in the United Kingdom.
As soon as you become an employer, you need to register with the tax authorities.
You will need to keep a payroll, which calculates how much pay is due to each employee, together with the amount of tax and, if appropriate, NI that is payable.
In the United States, usually some form of employee insurance/protection is compulsory. In many states, there is Part 1 for compulsory coverages and Part 2 for noncompulsory coverage. Essentially employee compensation is structured as an insurance system, where any wage and medical costs are financed via insurance premiums.
Employment Law
Employment law is becoming ever more extensive and complex and is continually changed and updated.
In the United States, under the Fair Labor Standards Act, employers are required to:
• Pay the minimum wage
• Pay overtime for hours worked more than 40 hours per week
• There are many local state laws regarding minimum wage, overtime, and mandatory breaks
In the United States, the most important federal employment laws you need to embrace, once you become an employer, are as follows:
• Job discrimination
• Overtime/minimum wage
• Family leave
• Age discrimination
• Disability discrimination
• Military leave
• Gender-pay alignment
• Workplace safety
Likewise, in the United Kingdom, employment legislation will place obligations on you as an employee, in several sensitive areas including those given as follows:
• Minimum wage
• Discrimination based on trade union membership
• Working time directive
• Disability discrimination
• Discrimination based on race, gender and faith
• Equal pay for equal work
Discrimination
As an employer, there are two forms of discrimination you must be aware of:
• Direct discrimination: Usually, this is clear enough to see and therefore avoid. This is where you would openly treat one sector of the community less favorably than others. Most direct discrimination is explicitly against the law. For example, if you are looking to recruit and say only a certain gender can apply or if you were to refrain from interviewing potential employees in the basis of their color, religion, or origin.
• Indirect discrimination: Often, this is a more contentious area, although in the event of any dispute, often the tendency is to favor the complainant rather than the employer. Indirect discrimination is where you are shown to place an unnecessary requirement or condition on a particular job you are recruiting for which will, by clear implication, exclude certain members of the community. An example would be a requirement for fluent English when the role doesn’t require such a skill.
Quite clearly, good working relationship with all your employees is a fundamental characteristic of good business practice. There is also good reason to avoid any issues of discrimination. First, if any cases are proven against you, there will be compensation implications. Furthermore, there could be considerable reputational damage.
Disciplinary Procedures
In this area, any rules must be fair, proportionate, and reasonable.
Typically, rules will include:
• Work performance
• Expectations around productivity, timekeeping, and absenteeism
• Negligence and disregard for safety or hygiene regulations
• Theft, including fraud
• Offensive behavior, including abuse, harassment, discrimination, and violence
• Inappropriate behavior, including misuse of company facilities
Employer Liability
If you employ anyone, in most cases, you are legally obliged to have employer’s liability insurance. This is a policy that protects you from any compensation and legal costs that result from claims that employees may make who are injured/made ill as a result of their employment with you.
In the United States, if you employ an American national, you must take out the American equivalent of Employer’s Liability to comply with local law. Furthermore, if you are employing an American national, they will not be covered by a British employer’s liability insurance policy. All your employees will be required to have a U.S. Federal ID Number.
Health and Safety
An integral aspect of entrepreneurship is managing risk. Every business will face risks, especially in the early days, for example, with cash flow and bad debts.
It is vital to remember that in the unfortunate circumstances of a serious accident to you or an employee, you could be put out of business.
Ensuring your place of work is safe is a legal requirement, and there are penalties (in some cases they can be severe) for noncompliance.
In the United States, the Department of Labor (DOL) has responsibility for the administration and enforcement of the prevailing health and safety legislation. All employers, obviously including you, have a general duty to provide work and a workplace free from recognized and serious hazards (as stated in the Occupational Safety and Health Act 1970).
In the United Kingdom, the Health and Safety and Work Act 1974 (HASAWA) determines a wide range of responsibilities for employer’s adherence. You as employer are legally required to protect the health, safety, and welfare of all your employees, as well as any others, while on your premises. This requirement includes temps, casual workers, self-employed, clients, visitors, and the public.
Managing Your Cash Flow
Most would say that your cash flow is the lifeblood of your business. So, it is critical that you receive and make payments on time. You need to ensure that you get paid on time so (via cash or near to cash) you have the means to finance your ongoing/day-to-day financial commitments.
Planning for Prompt Payment
There are several aspects that need to be explained to your customers before confirming an order.
• Your credit period: How long you are prepared to wait for payment. The process here is for you to raise an invoice which then passes through your customer’s systems, and if appropriate, approval processes before payment to you is confirmed. There is a real-world risk that your customer will delay payment as long as possible as this is best for their own cash flow. Thirty days from the date of your invoice is the common credit period. For a brand-new customer, which all of yours will be in your early stages, you may offer no credit period at all, until your business relationship becomes more established and secure.
• Carriage charges: If you are selling goods rather than services, then any carriage or dispatch costs need to be included in your invoice.
• Additional expenses: If you are selling services, you may incur additional expenses, which need to be defined, clarified, and agreed with your customer, for example, travel and accommodation costs.
• Retention of title clause: These can be included in your invoice, depending on what you are selling, most likely goods. This means the goods remain your property until paid for.
Validation of Your Customer’s Creditworthiness
Clearly, it is important that you are comfortable with your customer’s ability to pay you the agreed amount on time.
There are a range of details you need to acquire:
• Identification of your customer although in some instances they may already be known to you
• Full name and address
• Contact details for any payment queries, including address, telephone/mobile numbers, and e-mail
• Address to send invoices if different from the aforementioned
• Your customer’s banking details
Hopefully, everything will go to plan when you invoice, that is, you receive prompt payment. However, the real world tells us it is always best to be prepared for all eventualities.
Your Invoices
Your invoices should be clear and easy to comprehend.
They should include the following:
• The amount due
• An exact description of the goods or services provided
• Your customers purchase order or reference number. It is essential to have a clear audit trail
• Your terms and conditions
• Date for payment (based on the credit period confirmed in your terms and conditions)
• Your address and contact details
• Your VAT number, if applicable
• Your bank details: name, account number, and sort code
Always be prompt with your invoicing. Send your invoices out the day your goods are delivered or services provided. As above, ensure your invoice goes to the correct contact (this is particularly important when dealing with a larger organization).
Chasing Payments
This may be an experience you will never encounter. However, it is always best to be prepared.
If payment becomes overdue, send a prompt reminder. NB: A payment is defined as late if it has not been made by the last day of the agreed credit period.
Hopefully, any late payments will be due to a genuine oversight by your customer.
In case of need, you may need to:
• Contact your customer by phone
• Send your customer a letter of claim, which can be sent any time after an invoice becomes overdue. This is a letter putting your customer on notice that court proceedings may be brought against them
• Commence legal proceedings (further details on the legal aspects are beyond the scope of this book)
As with previous chapters, this chapter has looked to bring together many different aspects of running a business. There is always a lot to consider and to balance, but with tenacity and a willingness to learn, comes a foundation for success.
We should work on our process, not the outcome of our processes.
—W. Edwards Deming