Factsheet 3: How to Set Up as a Sales Agent

PREPARING YOUR BUSINESS PLAN

This is the first step to set up as a sales agent. The aim of a business plan and financial forecast is to help you recognise as much as possible that is involved in starting up as a freelance sales agent, from testing its strength as an idea, to assessing your financial needs.

Even if you decide you do not really need financial help, putting the plan before your bank as part of an application for a small overdraft or loan is a good and cheap way of getting a second opinion.

Always be ruthlessly honest in your estimates. Remember, you will pay the price of any mistakes.

Using your bank’s standard business plan format.

Many banks now provide a blank business plan in the form of a booklet for you to fill in. These are excellent as far as they go but they cover all types of business and can be irrelevant to your business in places. In most cases a simple budget, a cash flow forecast and a few answers will be all that is required.

A sales agent’s financial affairs are relatively simple in business terms. Do not allow anyone to persuade you otherwise.


Your likely expenditure

The most likely items of initial expenditure are

  • purchase motor vehicle
  • fuel
  • vehicle service, repairs and tyres
  • telephone & internet costs
  • stationery and postage
  • office furniture
  • rent, heat and light
  • insurance and national insurance
  • secretarial costs
  • bank charges
  • loan repayments
  • drawings against expected profits

On the matter of drawings, i.e. wages to yourself, remember that they are ‘drawings against expected profit’ and you will only be taxed on your total profit including drawings. Try to take out the lowest drawings you can manage initially.

Other charges, such as accountants’ costs, may not come in until the second year. Some items listed can be reduced substantially, such as using a computer to cut out secretarial costs and working from home to reduce rent.


Your likely income

The likely income from your efforts are extremely difficult to predict with any certainty.  Nevertheless, you have to make a forecast. All you can do is add up our total predicted expenditure for the year and that will show us the total income we need for the first year without any profit.

This income requirement then can become our total sales forecast for the first year. Do not forget to add the money you are prepared to put in to the business as income, especially if you will be approaching outside finance. They like to see a commitment by you.


The cash flow forecast

Forecasting how the money goes in and out is vital to you and your bank manager. Many items such as telephone bills only occur quarterly. Office furniture and stationary will be paid out at start up. Make a forecast sheet and put the expenditures in how they will occur.

Then add your income. Put any money you propose to add to the business in the first month’s income column. The monthly income from commission will be variable and impossible to forecast initially.

It is highly likely that the first month’s income is nil and will rise from that.

You will have to take your total yearly income forecast and split it into ever increasing monthly amounts. The difference between monthly expenditure and monthly income is your cash flow forecast for that month.

Do not worry about negative cash-flows, i.e where expenditure is greater than income, in the initial months. Your bank will expect this. It is the forecast cash-flow at the end of the year that will be relevant.

 

FINANCE AND WHERE TO GET IT

There are many places to get finance but you will find that the relatively small amounts you may need does restrict your choice.

Sources of finance

  • your bank
  • finance houses
  • various local ‘start up’ schemes

Try to spread the finance by, for instance, funding the vehicle from a hire purchase company and the balance from a bank. Try to avoid giving personal guarantees where possible.


The importance of your presentation

The neat presentation of your proposal is extremely important. If your typing is not very good, get your local secretarial bureau to do the layout for you.

 

DECIDING YOUR WORKING TERRITORY

The area you work in has a vital bearing on your profitability. If you work over too large a territory you will incur extra travel expenses and rob yourself of selling time. The decided area must however, contain enough potential business and have as many of your existing connections as possible.

Your decision will also be modified by the areas available for the agencies you will be seeking. Do not make the mistake of covering one geographical area for one principal and a different area for another principal. A slight extension of your area to accommodate a principal will not affect your profitability but major extensions will.


WORKING FROM HOME

The majority of agents work from home, at least initially. Try to set a room aside to do your paperwork and telephoning. A certain reasonable percentage of heating, lighting and council tax costs can be set against profits. All office equipment is a tax-deductible asset.


YOUR LEGAL STATUS

When you and your principal agree that you shall become his agent, he is bound, by law, to honour any agreements to third parties you may make on his behalf. That you made this agreement outside your agreement with him is no defence for him. He must honour the agreement as if he made it.

He can, however, try to recoup any losses he has made in such instances from you, if you have acted outside your joint agreement. This rarely happens in practice but does show the protection that can be given by a written agreement.


Forming a limited company (Ltd)

The decision on whether to form a limited company is best discussed with your accountant. In the early days it is usually more tax efficient to trade as a ‘sole trader’ or a ‘partnership’. You will also find it easier to obtain finance if you are a sole trader.


Choice of agency name

You can now give your agency any name you wish, apart from copying another company name, without the need to register with Companies House. You must however put your own name and the company address on all communications.

The choice of company name should be given some thought. Some agents just use their own name or initials and add the word ‘marketing’ or ‘agent’ or similar. Try to avoid too grand a title such as ‘Worldwide Systems Ltd’ as you will raise prospective customers expectations too high. Never try to give the impression of what you are not. Low key credibility seems to work best for sales agents.

 

MANAGING INCOME TAX AND VAT

It is essential that you keep proper records in order to prove your income and outgoings to the relevant tax authority. Even if your system consists of two nails on the wall for bills paid and unpaid and sending them to an accountant at your year end, you must keep records.


The V.A.T. position

Before you start this will need careful consideration. The ‘VAT threshold’ i.e. the amount of taxable supplies, or commission invoices in your case, before the need to register for V.A.T. has been increasing of late.

You will have to register for VAT:

  • if at the end of any month the value of the taxable supplies, i.e. commission invoices, you have made in the past twelve months has exceeded the latest threshold figure
  • at any time there are reasonable grounds for believing that the value of taxable supplies you will make in the next 30 days will exceed the latest threshold figure

It is therefore unlikely that you will need to register for VAT initially. When you do need to register, there are explanation leaflets available from your local VAT office.


USING AN ACCOUNTANT

The costs of using an accountant should normally be (at least) recouped by the tax he saves you. Respectable accountants usually have good relations and are trusted by local Inland Revenue and can act as a buffer for you in any disagreement on taxation.

They can also act as business advisors and will suggest on matters such as finance, tax efficient pensions and many other financial matters.  You will probably be charged for this advice so keep your time with him to the minimum.

Doing your own simple bookkeeping will cut down the cost of using an accountant. They charge by the hour. He is then just checking your figures rather than assembling them. There are many simple computer programmes that can do this easily but you can also buy a cheap ‘self-employed accounts book’ that can be filled in and submitted to the accountant.

  • ask other small businessmen for a recommended accountant.
  • make sure he knows what you are trying to achieve
  • do your bookkeeping at least quarterly
  • keep every business invoice or docket
  • submit your figures to him on time.

 

Excerpted from the book: ‘How To Be A Freelance Sales Agent’. by Terry James. Additional content and editing by Paul Brown, MD of AgentBase.