Our Q&A with Freeagent

Posted: Thu, 25 July 2013 by

We were lucky to have a Facebook and Google + Q&A with Emily Coltman Chief Accountant to FreeAgent . The theme of the session was “How to manage your accounts during and after a crowdfunding campaign”

If you couldn’t make it or missed out then we have compiled all the question and answers here!

Q: "How do I know how much money to ask for?"

Emily: When you're planning to raise money, you need to have a very clear plan of how much you need. Add up all your costs - and I mean all of them. Include all those little bits of software you might be tempted to buy, travel costs to visit clients, postage, delivery, tax, the works. Don't underestimate how much you might spend, and don't expect to sell too much too soon. Err on the side of pessimism if you're not sure and don't forget you will also need to live! Budget for enough money for this but equally don't expect to match your salary straight away, if you're leaving a job to start a business.

Bloom:From our perspective it's also important to remember that you will need to include the 5% commission and also the PayPal fees into the total.  There's also the "time" cost - running a crowdfunding campaign is hard work and requires a lot of effort.

Q: “How much does it cost to run a crowdfunding campaign?"

Emily:There are lots of costs you need to factor in. The crowdfunding platform will charge commission (as BloomVC mentioned) if your project is successful. If you collect the money through PayPal or GoCardless or Stripe then these services will charge you a fee too. Allow for lots of time to spend talking with potential investors and answering their questions. You'll need to budget for the costs of making and posting your rewards to customers, as well as potentially the cost of making a video for your crowdfunding campaign. That's on top of all the other costs associated with running a business!

Bloom:We wrote a blog about setting a crowdfunding target - hope it helps

Q: "How do I account for tax on the money that I raise in a crowd funding campaign? Do I have to declare it?"

Emily:Don't make the mistake of assuming that the money raised through crowdfunding is tax-free. If you are adopting reward-based crowdfunding (i.e. you're giving a product to people who fund your project), then you are effectively making sales of those products and you'll have to pay income tax and class 4 National Insurance (if you're a sole trader) or corporation tax (if you're a limited company) on your profit - which will include money raised from the rewards. If you're using equity crowdfunding it's a little different and I'd advise speaking to your accountant in that scenario.

Q:"How do you record the money raised in your accounts?"

Emily:If you haven't already registered your business with HMRC when you start your campaign, then you need to - if you're going to be a sole trader then register here and for a limited company, register at Companies House and they will let HMRC know. Don't try and hide your business from HMRC - they have eyes everywhere!

Q: “If you're self-employed - or not employed - how do you let them know? Do you have to declare on a tax return? "

Emily: If you are not already self-employed then you have to register your business with HMRC as per my last answer. You would then have to declare your profit on your tax return, in the self-employment section - but remember you pay tax and National Insurance on your profit, which is income less day-to-day running costs, not on income only. Be careful because you may also have to register for VAT once your sales go over £79,000 a year, and if you're selling overseas you may even have to register for local VAT in those countries. If your business is a limited company, you still have to do a tax return and put on it any salary or dividends you receive from the company. The company also has to file accounts and an Annual Return (a document saying who the directors and shareholders are) with Companies House every year, and the company must also file its own tax return. There's a lot of paperwork involved in running a business!

Q: Are there accountants out there who specialise in helping people who run crowdfunding campaigns?

Emily: Crowdfunding is quite a new way of finding finance, and to be honest I don't know of any accountants who specialise in running crowdfunding campaigns - there may be a gap in the market if any accountants are watching this! What I'd make sure is that your accountant does their research thoroughly so that they can warn you of any potential pitfalls, and goes through your plan with you in detail.  If you don't understand something your accountant says, ask them for an explanation! Accountants should always be able to talk plain English!

Q: How important is it to have a robust financial plan, and how do you go about monitoring your progress against target? What financial goals should you set?

Emily: I would always recommend doing a business plan and a financial forecast for all businesses, however you're crowdfunding - whether that's rewards or equity. If you don't plan your finances, you don't know when you might run out of cash, and running out of cash is the number one cause of small businesses having to close. Having a robust financial plan is crucial - fail to plan = plan to fail! Make it a monthly job to check how much cash you have in the bank against how much you planned to have at that time

Q: How do you place a fair value on a reward?

Emily: Ultimately, any product or service for sale is priced fairly if the price is a figure you're happy to charge and also a figure your customer is happy to pay.  Think why your customers would want the reward you're offering, and what they would pay to get that reward elsewhere - if they can!

Bloom: We always advise our project owners to be really creative with their rewards and, where possible, to offer rewards that people couldn't get unless they backed the project. Rewards need to be fair and backers need to feel they're getting value for money

Q: Could you share with us your top tips for keeping on top of your finances during a crowdfunding campaign?

Emily: I would say that both during, before and after your campaign, you should make sure you are always on top of your finances, that you know what money you have received and spent - and how much you expect to receive and spend!  Send invoices promptly because without invoices customers can't pay you.  Track your costs as soon as you incur them - use a mobile app like ReceiptBank to track out-of-pocket expenses on the go and send these to your accounts programme (hopefully FreeAgent!)

 

Thank you so much to Emily whose advice has been excellent. If have any further questions about crowdfunding and finance, please get in touch with us on Twitter, Facebook or email: eva@bloomvc.com