You are by now confident of the ins and outs of living the dream with regard to the property and the area. What about the financial side of things? Not so exciting, but it’s essential to get this right. If you need finance you’ll have to draw up a business plan. You should also be working to a budget, both for setting up and for the everyday running of the business. And what about cash flow? Money will be scarce at the start-up of the business and probably for some time after that. You need money to live in the meantime and also to carry out any building development necessary. Lots of aspects to view, and this is the time to face up to them.

Business plans

These are not as intimidating as they sound – a good business plan will focus your mind as well as helping you get some financial support.

What sort of information do you include?

• 1.Your business and your product or service.

The background

• Your business and your product or service.

Your service or product

• Your business and your product or service.

• 2.Your market and competitors.

Who is your market?

• Your market and competitors.

Who are your competitors?

• Your market and competitors.

• 3.Marketing your business.

• Marketing your business.

• 4.Management.

• Management.

• 5.Financial forecasts.

• Financial forecasts.

• 6.Financial requirements.

• Financial requirements.

• 7.Appendices.

The information here is used to support the main text of the document. It includes:

• Appendices.

• 8.The summary.

Although this summarizes your whole plan, it goes at the beginning. Avoid technical jargon and use it to sum up six main areas:

• The summary.

• 9.Presenting your document.

• Presenting your document.

Cash flow

It is always difficult to estimate costs and income in a new business, but even if you’re not going to ask for finance and won’t be producing a business plan, you will definitely find this useful. It’s only when you get down to the fine detail of expected income and probable expenditure that reality bites. We did this because we had to when we were applying for some financial help, but we’re glad we did. It made us think very clearly about what we would spend the money on. And what we wouldn’t!

It needn’t be an over-complicated document. We drew up a five-page cash flow forecast for five financial years. Each page had a column for every month and a row for each type of income or expenditure. (Excel is a good tool to use for this.) The income was broken down by ‘source’. We had three: self-catering, training workshops and arts/crafts courses.

Initially we intended to focus on building the self-catering side, with expansion into the workshops and courses at a later date. We listed the expenditure under the different things we expected to have to spend money on. These vary enormously depending on your business of course, but there are always the main ones: insurance, heating and lighting, telephone, car and travel, postage and stationery, accountancy/book-keeping, rates, advertising, bank charges and bank/building society repayments.

You will probably have to buy some fairly major items of equipment or furnishings, at least when setting up, so capital expenditure is another heading. Then of course you may have materials to buy for the business on an ongoing basis. You’ll have drawings or salaries – you have to live! Be as truthful as you can and as clear sighted – underestimating what you can live on will lead to trouble early in the life of your new business.

Your opening balance for the first month of the first year is £0. Add the difference between the income and expenditure for that month (it will more than likely be negative as you may not yet be earning) and you have the monthly movement (a negative figure in the case above). Add the opening balance and the monthly movement and carry it forward to the next month as the opening balance.

The whole process then repeats itself month after month. As you earn more and more each month and keep expenditure at a reasonable level, the figures for the monthly movement and the opening balance each month should begin to improve.

The cash flow data certainly helps to focus the mind on that all-important earning power! Looking at the figures you’ll see the obvious problem. You won’t be earning enough to live on for the first while, let alone pay all the bills. This means you need back up – money in hand. This is where your savings come in. Unless you have some cash in reserve, perhaps from the downshifting, you’re going to have a real problem.

Simple book-keeping

Book-keeping makes the paperwork easier. Keeping it up to date means you know exactly what’s going on. There are several good computer packages you can use or you may prefer the traditional paper system. If you think you’re going to need a computer package later on when your book-keeping gets more complicated, it’s better to start with one now.

What records do you need?

You’ll need to record all the money going into your business and all the money going out, not just to keep track of things but also for your tax records. You’ll need to keep:

• records of sale or money paid to you – issue an invoice or receipt (keep a copy), mark the stub of your bank paying-in slip with amount, date and name or invoice number;
• receipts or invoices for everything you buy or pay for – number these in date order and keep them in a file;
• bank account statements – open a separate account for the business; ask for monthly statements;
• statements of business loan payments from your bank or building society;
• records of any cash payments made – receipts or a written record.

Cash books

You will also need a cash book of some sort to enter all this information. This can be an analysis book (with several columns on each page) or, if you’re using a computer package, this will perform the same function. We use a very simple book-keeping system which is paper based as our business is not very complex and won’t become more so. In the front part of the book, we have a page per month for expenditure. In the first column on the left we write the item of expenditure with the date it is paid – telephone bill, six new chairs, etc. The next two columns are headed ‘account’ or ‘cash’. The rest of the column headings show the type of expenditure – think this one out before you start. Your accountant will help you, but some of the usual types of expenditure are advertising, postage, building/plumbing, transport, heating/lighting etc. You’ll notice that each amount is entered twice, one showing how the money is paid – as cash or into our bank account – and the other under the appropriate heading.

January

With some of the receipts, particularly those for petrol, telephone, internet and heating, we charge only a percentage of the bill to the business. This makes sense as not all our car journeys, for example, are to do with our business. The percentage you charge is up to you but your accountant and the Inland Revenue have to be convinced it’s the right one. At the end of the month the totals should balance – the sum of the two left-hand columns should be the same as the sum of all the others.

At the back of the book we record the money we receive. This is much simpler. Again it is in months, with the source of income (dated), whether banked or cash and which part of the business the money was for. Again at the end of each month the totals for ‘banked’ and ‘cash’ should add up to the sum of the totals for the type of business.

January

This is a very simple system but it has kept us going perfectly adequately for years, and probably more important, it satisfies our accountant too.

Money in the future

The basic groundwork is done and you are ready to move on. You know how to produce a business plan and a cash flow forecast, and you’ve thought about how you are going to ‘keep the books’. It’s time now to consolidate what you know and to make sure that you have thought about all the financial aspects of your new business. Have you planned well? Are you confident about setting up your new business? What about the first year? Do you know where you’re going financially? And then of course there is the longer-term view. Are you prepared?