Little Things Add Up #3 - Ongoing Costs I
This is part 3 of 4 of our guest blog by Janice Turner - designer of Assembly (which funded on Kickstarter in July 2018).
There are a number of ongoing costs associated with running a business. Some of these costs are mandatory, although their applicability depends on the choices you have made in your product design and company creation. If you don’t do/pay for something you are meant to, there are generally fines for non-compliance.
Other costs will be optional and will depend upon how many hours you yourself want to put in or whether you want the simplicity of someone else doing it for you.
The commonality between most of the costs in this section is that they are related to the finance part of the business. They do not necessarily need to form part of your Kickstarter goal, but you should be aware that they exist and plan on how you will cover them.
Import Duties, Taxes & Bonds: You may have put EU/US/Canada/Australia friendly on your Kickstarter page but make sure you know what this really means. If you have promised this and your base costs increase such that they go over the minimum allowable amount to be VAT/GST free then you may need to look at alternative solutions, particularly if sending a pallet in country isn’t a feasible option. For example, Canada has one of the lowest thresholds for importing goods at just CAD$20, equating to just c. £11.
Sales Tax & VAT: Depending on where in the world you are, your finances and your business model, you may choose to voluntarily register or have to register for VAT and/or your sales may be liable for sales taxes. This means that a percentage of your selling price (19-25%) will be payable to the relevant government in tax. This is in addition to tax on your profits. Make sure you budget for this in your pricing model, in particular your unit price whereby a 1:5 (or 1:6 with VAT) cost to consumer price is recommended as a guide. You should also realise that retailers and distributors expect the standard discount on the ex-VAT price (e.g. a retailer will expect to pay £10 for a game with a selling price of £24, assuming a 50% discount based on the ex-VAT price of £20).
Tax on Profits: If you make profit as a result of your Kickstarter, you will have to pay tax on them so ensure that you have sufficient funds to cover this tax bill (c. 15-40%). Your company accounts are done at the end of your financial year which is when your year-end profit is calculated. If, for example, you have not yet paid your manufacturer before the end of your financial year, all the money you hold in your bank account will be considered ‘profit’, thus eroding your total amount of money available. This means you must carefully plan your expenditure to make sure you don’t get caught out.
Employer Taxes: If you are paying yourself a salary from your earnings you will need to account for any employment taxes such as NI in the UK. Check out what are relevant in your own country so you don’t get caught out.
Pension: In the UK, if your business consists of more than 1 salaried person you will be legally obliged to automatically enrol at least 1 of the employees in a pension scheme. They can just then opt out (costing you nothing but time) but it’s once again another consideration when starting up a business. However, if you plan this to be your full-time job at some point, perhaps setting up a pension isn’t a bad idea?
Bank Account Fees: If you register as a limited company, it his highly advisable (if not required) that you have a separate business bank account for all your business transactions. However, unlike personal banking, business banking isn’t free. Depending on the bank you may be charged per transaction (c. £0.10-£1 per payment) and a monthly or annual fee (c. £5-£15 per month). Unless you plan to close your business bank account as soon as you have fulfilled your Kickstarter, you need to budget this as an ongoing cost. And if you haven’t got quite enough money, don’t forget to consider overdraft fees which can quickly accumulate.
Book-Keeping Software: Although you can do everything you need to with Excel, online software does make booking keeping and tax returns much easier and much less time consuming. It will allow you to easily send invoices and import transactions from point of sales units, Stripe and PayPal. It’s up to you if you use these, but if you grow big enough you’ll probably want to invest in one of these at some point (£8-£30 per month). If you’re a UK VAT registered company, from 1st April 2019 you must use one of these approved software systems to submit your VAT return.
Accountant: An accountant isn’t a requirement for a business across the full year but you may find them useful. It depends if you are happy to do the day-to-day financial processes such as book keeping, quarterly tax returns yourself. You may find it useful to have a second pair of eyes to look them over after you have completed them or even for someone else to do it entirely. Either way, be aware you need to swot up on your accounting knowledge and/or have the money to hire an accountant to do it for you. However, if you opted to become a Limited company you’ll likely need to have an accountant check and file your end-of-year accounts. These accounts need to be filed with the IRS/HMRC and there will be fines for getting them wrong and/or being late so this isn’t really an optional cost. And you never know, they might even be able to find a way to save you some money!
Insurance: This is a complete minefield. There are tons of different things to think about and could be a blog post all on its own but given the broad nature of options and differing business setups, here is some of the things you may wish to research and consider when considering insurance (costing £200 – £2,500+):
Public liability, for attending and/or exhibiting at shows, visiting clients and suppliers, etc. Different shows have different requirements, so make sure you have adequate cover for all the shows you plan to attend, probably in the region of £2m-5m of coverage.
Product liability, in case someone sues you – also read up on right of recourse to see if this is enforceable, if not your insurance may be worthless. Also check where in the world you are covered and your excess in each area.
Stock Cover, in case of fire, theft, loss, etc.
Assets cover, for non-stock items, e.g. laptops - just like personal contents insurance.
In-transit, in case your container falls off the ship, the truck crashes, etc.
Shipping, for parcels to backers.
Car, make sure you are insured for business use if you plan to use it at all for things related to your business.
Employer liability, if you are employing other people (this may also affect volunteers – check your local employment law).
Offsite, e.g. cash, stock and assets at shows.
Depending At each stage in the process, make sure you know who is responsible in terms of insurance and what cover they have. For example, most shipping companies come with some base level of cover but this is unlikely to fully cover your stock so you may wish to top this up with your own insurance. Also, know who is liable for loading and unloading your product during its final journey – does the insurance you have cover this? You don’t need to insure against everything listed above, but I advise that you know how much risk you are taking and ensure you are willing to accept this. That way, if anything should happen, it happens with your eyes open.