The New Year is a time when many people dream about turning their hobby into a new career. While some may decide to become hobby preneurs due to personal circumstances, such as a redundancy or career break, others may simply find the freedom and flexibility afforded by being their own boss to be a hugely attractive proposition.
Whatever an individual’s reasons for establishing a new start-up, having a clear vision of what they want their business to achieve and establishing good financial systems from the start is crucial to achieving success.
Many people who make the decision to transform their Etsy sideline into a money-making venture have a significant advantage; they already know they love their job. However, while an element of passion is important, hobby preneurs also have a number of important considerations to make.
Beginning the process by asking themselves what exactly they are trying to achieve with the business is crucial, and will inform other key decisions further down the line. Usually, this comes down to whether the goal is to create a business empire, with an emphasis on maximising profits, or maybe the individual simply wishes to improve their work-life balance through being their own boss.
Once the person has defined a clear ambition for their start-up, the next step is to decide on the best business structure. For those who view their venture as more of an extension of their hobby than a money-making opportunity, with low levels of turnover, risk and a smaller profit margin, remaining as a sole trader may be the most sensible option. On the other hand, where a start-up represents a person’s sole method of income, and generating profit is the primary objective, incorporation is likely to offer a safer route.
A good rule of thumb when thinking about this choice is that if a business tends to operate through family and friends, it is probably best to continue as a sole trader. Where an individual promotes and sells their goods or service externally, it is often worth considering incorporation. While setting up a company often proves to be the more complex option, this has the advantage of providing a layer of protection in the event that things do not work out as planned.
Budgeting and putting in place the right financial processes can also play a crucial role in the success or failure of a new start-up. A straightforward place to start could be taking a piece of paper and simply writing down the costs the individual needs to charge to break even, and deciding whether customers will be happy to pay these costs.
Determining a pricing structure
For example, the owner of a cake-making company may need to consider factors such as the cost of ingredients, energy, packaging and distribution, as well as potentially factoring in elements such as promotional, website and e-commerce costs. These areas will help dictate a cost-per-unit price, which in turn will allow profits and a sensible selling price to be calculated.
To ensure a venture stays on track when investing in its promotion and development, it is also wise to write down a timeline of specific business goals and the actions required to achieve these, as well as keeping an accurate record of receipts and expenses. For sole traders, keeping a spreadsheet in Excel is probably an effective and cost-efficient way of doing this, whereas incorporated start-ups with a higher turnover may wish to consider investing in a more sophisticated cloud computing system.
Being aware of tax thresholds and which the business and entrepreneur may fall into is important. For example, if individuals suddenly find themselves liable to pay VAT, profits will effectively be reduced by 20 per cent and failure to register could result in a hefty penalty.
Setting up a separate bank account
Another important part of maintaining good financial processes is setting up a separate bank account, helping to clearly distinguish between business and personal costs and income. While there may sometimes be a temptation during the early days of setting up the business to dip into personal funds, this could cause complications when trying to establish profit and work out cash flow.
Another common pitfall when establishing a start-up is to go ‘all in’ too early, rather than beginning small and simple, and building up later. Instead of aiming to sell a diverse range of products from the beginning, focusing on a smaller number can often help to keep material costs down, avoiding a business failing before it even starts.
Similarly, in the early days of setting up a business it is worth bearing in mind that any additional hires will directly hit profits and cash flow. However, rather than employing staff on a fixed-contract basis, hiring employees willing to work flexibly and getting them to work as and when needed, is a good way of keeping staffing costs under control.
Hobby to job
Australian Facebook group ‘Mums the Word’ recently hit the headlines when its founder controversially asked members for a one-off, retrospective joining fee of $10, claiming that the hobby had become a 24/7 job. The story is a reminder of the need for hobby preneurs to put in place a robust scaling-up plan from the start and prepare for all possible scenarios. Asking ‘what if’ with regards to a range of potential situations can help business owners to respond promptly and effectively to unforeseen circumstances if they arise, for example, a bulk order or a request for a significant discount.
There is no doubt that deciding to take the plunge and go it alone requires a certain mindset, however, with careful planning, the decision to transform a personal passion into a business can bring significant rewards. By carefully thinking through their key business objectives and taking an organised and honest approach to financial processes early on, hobby preneurs can make a healthy profit whilst enjoying the job they love.
Andrew Mosby is a partner at Menzies LLP.