How to start a catering business

Why start a catering business?

There’s risk in giving up your day job to start your own business, but the rewards are huge if you get it right. It’s a lot of hard work (especially in the early days), but there can be no greater satisfaction than seeing something you’ve built become a success (and you might be able to afford a nicer car!). Some other reasons to start your own business include:

• you are your own boss
• you are doing something you enjoy
• you are able to set your own working hours (they’re usually long!)
• you decide how things should be done
• it’s relatively simple to do (but hard work to be a success)

What should I do first?

First things first, it is important to conduct some form of market research to find out if there is enough demand to return a comfortable profit. In fact, the success of your business probably depends on it.

Almost 10% of food service businesses fail to live long enough to celebrate their first birthday, and a lack of understanding about the market is often cited as one of the main reasons for those failures.

Market research requires some time and money but is a major factor in giving small business the best chance to get through a challenging first 12 months.

How Do I Make My Market Research a Success?

You need to have a clear idea of exactly what you want to obtain from your research. What questions are you trying to find the answers to?

Some questions could include:

• who are my potential customers?
• do they live near my business?
• what do people who live near my business want?
• what are their buying habits?
• are they likely to buy from me?
• who are my competitors?
• how much do they charge?
• are they struggling or successful?
• how saturated is the market I am looking to enter?

Once you have compiled your list of questions, it is time to get out there and find the answers!

Types of Market Research

Primary Research

Primary research involves collecting your own data about the products and services you plan to offer. It involves activities such as questionnaires, surveys and social media polls. Conducting primary research is a lot easier if you already have a database of customers from which to collect your data.

If you do not have access to an existing customer database, you could do something as simple as go to your local high street, shopping centre or supermarket and ask members of the public for a moment of their time to answer your questions. There are also lots of companies who specialise in compiling and analysing market research data for businesses.

Secondary Research

Secondary research is collecting relevant data that has been published by others. This involves something as simple as an internet search. Things you need to be aware of are to always check the date of the research that has been published. What was relevant three years ago may not be relevant right now.

Always try and use data from reputable sources. Government organisations and companies who specialise in publishing reports and statistics offer the most accurate and up-to-date information that will be of use to you.

How will I fund my catering business?

If your market research finds that your business is sustainable, the next thing you’ll need to do is decide how you are going to fund it. There are a lot of costs to consider before you can officially start trading.

The actual cost of setting up a business is influenced by lots of different factors, but a report released by Lloyds Banking Group in 2016 suggests the average cost is around £12,000. The majority of costs incurred (25%) relate to securing property for the business, with transport and IT also cited as other areas of significant outlay.

At this point of your planning, you need to prioritise. Spend on the essentials needed to be able to start trading. Where else could you cut back?

Do you need to spend on property? Is it possible to start your business from home initially? Do you definitely need a new van or a new car? Could you start off using your existing vehicle? Could you use a free online website building solution instead of hiring a developer?

Keeping your start-up costs low, without cutting corners, will mean you are under less pressure to generate money in the first few months of trading.

TIP: The cost of commercial kitchen equipment is usually a significant when starting a catering business. Sound investments in robust and reliable equipment will pay over the long term. There are lots of ways you can purchase high-performance equipment at great prices without compromising quality. It’s always worth keeping an eye on our special offers and clearance section. You’ll be able to find lots of limited-time offers on a selection of products along with reductions on end-of-range items. You could also investigate leasing, which allows you to spread the cost of buying equipment across a period of up to 3 years. Get some more ideas on how to save money with our buying catering equipment on a budget guide.

What Next?

You will have to make a list of everything you need and then cost it as accurately as possible to determine how much money it will cost you to start trading. It is often advised to add 30% on top of your final figure to factor in any unexpected costs.

You can contact your bank to discuss a loan if you do not have the working capital available to you. Another option is to persuade a private investor to fund your business. It would be wise to seek the advice of a financial advisor before entering into any such agreement.

Always make sure the terms agreed are set out on legally binding contracts in the same way as if you were borrowing from a bank. If neither of the traditional options of fundraising is open to you, there is also the concept of crowdfunding to consider.

Crowdfunding is when a business or individual pitches an idea online in an attempt to secure a number of smaller donations to reach the funding target. Want to know more? We have put together a guide detailing how you can crowdfund your business idea with all the information you need to get started.

Operating costs

Once you have made the initial outlay to be in a position to start trading, you will then be responsible for managing your operating costs. Operating costs are the regular outgoings you need to pay to keep your business trading on a day-to-day basis.

It is important to keep strict control on your operating costs. If they start to exceed the amount you generate from sales, you will be operating at a loss. Operating at a loss over any extended period of time is unsustainable. The main operating costs of most catering businesses are split between fixed costs and variable costs.

Knowing the total of your operating costs and comparing them to projected sales revenue helps you to work out a budget.

Should you set up as a sole trader or limited company?

If you start working for yourself, the first thing you’ll need to do is inform Her Majesty’s Revenue and Customs (HMRC) of your changing circumstances. All individuals who earn over £1000 per year from business-related activities will need to register self-employed as a sole trader or limited company.

What is a sole trader?

A sole trader is a self-employed person who is the sole owner of their business. They can keep all profits from business-related activities once they pay tax and national insurance on them. It is a lot easier to become a sole trader than to set up a limited company. You also have less accounting responsibilities.

You simply have to keep a record of your sales and expenses as well as send a self-assessment tax return to HMRC every year. The major disadvantage of being a sole trader is that your personal assets are not considered separate from your business. This means that if your business gets into financial trouble, things like your home or your personal savings could be at risk.

What is a limited company?

A limited company is a structure that separates the business from its owners in financial and legal terms. Limited liability is the major benefit of setting up as a limited company. If things go wrong for a business, the only thing at risk is any investment the founder has made along with any assets attached to it. Personal assets are protected.

The other benefit is that a business will pay corporation tax. This is usually charged at a slightly lower rate than income tax. The disadvantages in comparison to working as a sole trader are that the structure is more complex and costly to set up. There are also time-consuming financial reporting responsibilities that may need the extra cost of an accountant. Your company’s organisational and financial information is also available for the public to see on the Companies House website.

What is best for you?

The answer to the question is for you to decide based on your own circumstances. You can always start out as a sole trader and then look to form a limited company as you establish your business over time. There are currently more sole traders than limited companies in the UK. It would be wise to get some advice from a financial advisor if you are still unsure of what is best for you.

What about paying tax?

As an employee, tax and national insurance is deducted from earnings under the PAYE scheme. When you branch out on your own, paying tax and national insurance contributions becomes your own responsibility. Sole traders must file an annual self-assessment tax return with HMRC. You will need to keep records of money coming in and going out of your business to determine how much profit/loss is made during the 12 months in question.

You will pay income tax on all profits made above the tax-free threshold. The importance of keeping all receipts, invoices and bank statements cannot be stressed enough. HMRC may request proof of how you calculated your returns.

Paying tax as a limited company is different. Limited companies pay corporation tax at a lower percentage rate than individuals, but all annual profits are taxable. From an individual point of view, you, as the business owner/director, will have to declare any money you have drawn from the company over the previous 12 months. Whether as a wage or otherwise, the withdrawn money becomes liable for income tax.

If you have registered as an employee of your own company, tax and national insurance is deducted in the normal way under the PAYE scheme. Seek the advice of an accountant or contact HMRC if you are unsure about any aspect of paying tax.

Article: Our beginner's guide to accounting for caterers has all you need to know about getting started with basic book-keeping

Creating a business plan

There is no right or wrong format for presenting your business plan, but, at the most simple level, it should include the following:

• your vision for the business
• reasons you think your business will be successful
• your unique selling points
• a clear understanding of your target market
• details of how you plan to market your business
• your short-term and long-term business goals
• forecasted sales/expenses over a specific timeframe
• where you see opportunities for future expansion

The quality of your plan will be a reflection of you as a person and indicate the amount of research you have put into your business idea. A sound business plan will inspire confidence in your potential lenders/investors. A poorly thought out and unprofessional document will have the opposite effect.

TIP: If you lack the confidence to create an investment-winning document, there are plenty of professional business plan writers offering their services online

How to register your business

You may have been catering for friends and family for many years, but it is illegal to do so without a licence once money starts changing hands. You will have to notify your local council 28 days before you intend to start trading. It is free to register a business in the UK. You are required to provide details of the type of business you intend to run along with basic details such as the address you will trade from.

Trading without a licence is punishable by a fine or up to 2 years imprisonment. Once the council acknowledges your registration, an environmental officer is sent to inspect your premises. An inspection determines whether your kitchen complies with requirements set out in the Food Safety Act 1990. You will also get a food hygiene rating mark out of five that the public can view on the council’s website.

You will need some basic understanding of food safety risks and procedures such as:

• cross contamination
• allergens
• labelling
• personal hygiene
• premises hygiene
• temperature control
• safe food storage
• use of additives and food colours

You also need to find out:

• if you need to notify your mortgage lender
• if you need business insurance
• if you need to pay business tax
• if you need to open a business account with your bank

There are also rules you need to be aware of if you are planning to sell any items worth more than £42 online.

See the UK government and Food Standards Agency websites for help, support and more details about starting a catering business.

Where To Begin?

When starting your journey it pays to talk to any business owners that you know and gain some valuable insights. Though there are packs available to help with legislation, allergens and hygiene, unfortunately there is no ultimate guide that covers everything.

There is so much more to a food business than the business plan, equipment and menu. The building, bins, parking and licenses are all factors that can easily be overlooked. The structure of the building can dictate what type of license you need.

Frying and grilling have different requirements, which is something to bear in mind early on in your planning process. Looking at food trends and competitors is a constant undertaking, but understanding food hygiene law and building regulations is essential before you can set up your business.