Tag Archives: mISV

Training course update

I ran my second ‘Start your own software business’ course over the weekend of 22/23 March. Here is what some of the attendees had to say:

“I thought I knew most things about setting up and running an ISV but Andy filled in all the gaps and taught me stuff I hadn’t even thought about! I would, without hesitation, recommend this course (which is great value) to anyone thinking of starting a small software company or even an existing company that wants to ensure they give their business the best chance for success. Well done Andy!”
Anonymous (gainfully employed)

Roger Pearson“PC Pro magazine (not easy to impress) gave PerfectTablePlan a glowing review. That gives you some idea of Andy’s talent for programming and marketing. His weekend training program allows the attendees to garner his expertise for themselves and their software projects. Andy knows his subject – his experience is extensive, practical and hard-earned. I have run 2 successful small software business in the past. By attending his course I wanted to find out from someone who was actually doing it today, how I could apply techniques and best practice to my next software project. Did I succeed? Without a doubt. Andy was meticulous in his planning of the event and thorough in his presentation. I couldn’t ask for more. Top marks. I recommend Andy’s course to anyone venturing into the world of running a small software business.”
Roger Pearson

Derek Ekins“I recently attended Andy Brice’s “Start your own software business” course. Andy teaches some very practical skills to evaluate your idea, find if there is a market and launch your product. Behind most of the topics Andy had a story of how this particular lesson was learnt and how he has successfully implemented it. I now feel I am equipped with some practical knowledge of how to launch a software product. Thanks Andy.”
Derek Ekins

I will be following all their progress with interest.

I hope to run the course again in 2014. If you are interested in attending, please fill in the form on the training page.

Announcing a new date for my ‘Start your own software business’ course

AH111220CO-2000x1297I ran my first ‘Start your own software business’ course in November last year. It was a lot of work to write the course and organize the logistics. But I am very pleased with how it went. I have had a number of enquiries about the course since then, so I am announcing another date: 22/23 March 2014. As previously, the location will be Swindon, England. The course is limited to 10 people (first come, first served) and there is an ‘early bird’ discount if you book by  07-Feb-14. For more details (including comments by previous attendees) go to the training page.

Training course update

I ran my first ‘Start your own software business’ course over the weekend of 23/24 November. It was tiring but enjoyable and, overall, I am very happy with how it went. I think the balance of presentation, questions, exercises and discussions was about right. Thankfully everything went smoothly with the logistics of room, meals, accommodation etc.

Here is what some of the attendees had to say:

Pavol Rovensky“To run your own software business is an aspiration of every programming enthusiast and many professional programmers. Most of them fail without knowing “WHY?”. I’ve known Andy Brice for many years and have met him at several conferences and heard  a lot about his product and working habits. When the information about this course appeared it was the easiest decision in my professional career to sign up. The course itself is delivered with passion and ease, yet the information content is incredibly rich.  The course covers all aspects of Starting a software business and Andy continuously amends the presentation with elements of his own experience and available data from other people. None of the aspects of starting a software business is left uncovered. He definitively gives an answer to aspiring programmers “HOW?” to start and avoid the failure; or fail fast and learn quickly.”
Pavol Rovensky, www.hexner.co.uk

Kevin Horgan“Andy’s ability to imprint the wisdom he has gained through successfully starting and running his own software business is amazing. The course covered a lot of material very quickly and effectively with plenty of time to ask concrete questions, all of which Andy comfortably answered from his experience in the field. I feel I have a much better focus now on where I need to put my time and energy to build a successful software company. The course venue, facilities and overall organisation were also excellent, from booking through to ensuring we finished on time so I could catch my plane. I highly recommend this course if you plan to start your own software company.”
Kevin Horgan, www.balancedcode.com

Anthony Hay“I’m a programmer and I’ve been an employee in other people’s software businesses all my working life. For some time I’ve wanted to create my own product to sell but I’ve found it difficult to evaluate the various ideas I’ve had and get started. Andy’s course is broad and covers all aspects of starting a software business, but the parts covering the early stages of product development were especially useful to me. Andy is a great communicator and I highly recommend this course.”
Anthony Hay, howtowriteaprogram.blogspot.com

“I was lucky enough to find out about Andy’s course in time, and wasn’t sure if it would help me figure out how to work for myself as an independent software vendor — I have the answer now — and it would be an understatement to say it pointed me in the right direction. I now see the possibilities, and the course has given me important insights into how I might go about the transition from ‘working for the man’ to starting my own micro ISV. If you get the chance, do go on the course. It’s well worth it.”
Jason Spashett, jason.spashett.com

“If you’re starting a software business, give yourself a big unfair advantage and sign up for Andy Brice’s course. Andy has spent eight years investigating numerous cul-de-sacs, all so that you don’t have to. Whether you’re working with desktop or web, selling to consumer, enterprise or developer markets, there are pearls of wisdom in there for everyone. Benefit from the advice of someone who’s been there in the trenches – it’s possibly the best investment in your fledging business you can make.”
Justin Worrall

I would like to say a big thank you to the attendees of v1.0 the course. I shall be following their progress with interest.

I hope to run the course again in 2014. If you are interested in attending, please fill in the form on the training page.

VAT basics for software vendors

The dreaded VAT. Ugh. Value Added Tax (VAT) is the European equivalent of sales tax and it is a Royal Pain In The Arse. However, if you are running a business that makes sales in Europe you need to understand VAT. In particular it has important implications for your choice of payment processor, even if you are based outside the EU or below VAT registration thresholds. I have put together a few pointers here in the hope that it will help someone grappling with the complexities of VAT. But please note:

  • I am not an accountant. If you need proper advice, talk to a proper accountant.
  • The VAT rules are complex and may be interpreted differently by different people.
  • The rules may be different in different countries.
  • The rules change over time.

Only VAT registered businesses have to charge VAT. You have to register for VAT once your sales reach a certain threshold. At the time of writing,  UK-based businesses have to register for VAT if their EU sales exceed £77k in a 12 month period (technically it is UK sales, but the ‘place of supply’ for EU consumers is classified as the country of the seller). You can also choose to register for VAT before you reach the threshold. But it usually isn’t worth it, unless perhaps you think having a VAT number is essential for your credibility. Personally I waited until I couldn’t avoid it any longer.

Even if your business is not based in the EU, the EU still expect you to pay VAT on any sales inside the EU once you reach a threshold. This is controversial and it isn’t clear to me exactly what the EU can do to enforce this if you are based outside the EU. Talk to your accountant.

The VAT rate varies between countries. At the time of writing it is 20% in the UK and 19% in the Netherlands. It also varies over time, it used to be 17.5% in the UK.

The UK also has a simplified flat rate VAT scheme with a lower VAT rate. But you can’t claim back VAT on purchases. Worse still, it appears that you will effectively be paying VAT on sales outside the EU. So that doesn’t seem at all attractive.

The VAT rules are complex and depend on:

  • where you are based
  • where your customer is based
  • whether your customer is a business or a consumer
  • whether you are selling goods or services

Technically you do not have to charge VAT to an EU business, even if they aren’t registered for VAT. Apparently they are then responsible for “self-charging” the VAT. However the burden of proof is on you to show that the customer is a business. So most vendors require a VAT number as proof of business status.

There also seem to be disagreements over whether software is goods or services. What if you ship a CD?

Here is a simplified summary in pseudo-code of whether a seller needs to charge VAT on software as I understand it:

paysVAT()
{
    if ( seller registered for VAT)
        if ( customer in EU )
            if ( customer is a business )
                if ( customer in same country as you )
                    return TRUE;
                else
                    return FALSE;
            else
                return TRUE;
        else
            return FALSE;
    else
        return FALSE;
}

Except that people in Norway and Switzerland (which aren’t in the EU) pay VAT in some circumstances. Don’t ask me why. Also you don’t pay VAT on some items, e.g. postage. And outside the scope of VAT (O), not rated for VAT (N) and zero rated for VAT (Z) are all different VAT codes meaning no VAT is payable. As I said, it’s complicated. Not complicated and interesting like quantum mechanics or the love lives of celebrities. Just complicated.

The only upside of being registered for VAT is that you can claim back the VAT you pay on any purchases you have made (make sure you get a VAT receipt). Or, if you are buying from another EU country, you can tell them your VAT ID and they shouldn’t charge VAT (see above). So any equipment you buy in the EU is now 20% cheaper. This is small recompense for the giving 20% of your sales in the EU to the VAT man. Try not to think about that. Instead give yourself a pat on the back for having reached the VAT threshold. A lot of businesses never do.

Note that when you register for VAT you may be able to claim back the VAT of products purchased before you registered. When I registered I could claim back VAT paid on goods purchased within the last 3 years and services purchases within the last 6 months. So keep your VAT receipts.

Congratulations on making it this far. Here is the important bit. How you process payments has important implications for VAT. When someone pays you via a payment processor, such as PayPal, legally they are buying from you and the payment processor is just handling the payment on your behalf (like a bank cashing a cheque). So you are responsible for collecting what VAT is due and paying it to the appropriate government. This can be a major headache if you are selling hundreds or thousands of licences per month.

When you use a reseller, such as Avangate or Fastspring, legally you are selling your licence to the reseller and the reseller is then reselling it to the customer. The reseller is then responsible for deciding what VAT is due, collecting the VAT and doing the paperwork. They then pay you net of the VAT and their commission. Leaving you to sort out the VAT for their one payment to you per month.

Using a reseller is a big win if you are registered for VAT. I am registered for VAT and use Avangate as my payment processor. They do the heavy lifting in terms of calculating, collecting and paying the VAT on my sales. But if you aren’t registered for VAT be wary of using a VAT registered reseller – approximately 20% of your sales will be disappearing in VAT (which the VAT registered reseller has to charge) which you could be keeping if the customer bought from you direct. So if you aren’t registered for VAT, a reseller such as Avangate or Fastspring may not be the best solution for you. Check out e-junkie.

VAT admin is fairly straightforward. To keep the VAT man happy I have to file:

  • an EC sales list every month
  • a VAT return every quarter

My Quickbooks accounting package generates the numbers for these. It only takes a few minutes to file reports online once all the transactions and VAT codes are entered correctly into QuickBooks. The VAT man then debits (or credits) the appropriate amount from my business account each quarter. It is not too bad, as long as I don’t think about the wheelbarrow loads of cash Avangate keeps to pay the VAT man. Maybe they roll around naked in it on the last day of every quarter. I probably would.

When I first registered for VAT I tried adding the VAT onto my existing prices. But I found that sales dropped more than 20%. So I ended up keeping the gross price (including VAT) the same, whether the customer pays VAT or not (Avangate gives you this option). Whatever you do, make sure it is clear whether any prices you quote include VAT. EU consumer expect to be quoted prices inclusive of VAT and won’t appreciate it if you try to sneak on an extra 20% at the end of the purchase process. You may be legally required to quote the price including VAT in some countries.

A final note of warning. The VAT man has a lot of powers. I understand the UK VAT man can kick your door in and seize your equipment without needing even a warrant. He might not be impressed to find out that the computer you reclaimed the VAT for is an XBox. Do not mess with the VAT man.

If I have made any mistakes, missed anything out or if the rules are substantially different in your country, please add a comment.

Thanks to Marcus Tettmar of Macro Scheduler automation software for checking this through and advising me on some of the finer points.

A curated list of 200 articles for microISVs and startups

I have been steadily adding to the curated list of links on this site. Currently there are links to 200 articles, loosely categorized into topics such as ecommerce, market research, product naming, Pay Per Click and SEO. I have tried to select articles that contain ‘actionable’ information, rather than wafflely articles about ill-defined subjects such as time management and motivation. Some of the articles linked to were written by me, but the majority weren’t. I hope you find something useful. I would be surprised if you don’t.

Go to the links page

Ten mistakes microISVs make

Here is a video of the “Ten mistakes microISVs make” talk I gave at the Software Industry Conference 2009 in Boston. Total duration: 27 minutes.

The slides aren’t terribly easy to read, due to the resizing and compression of the video. But you can also download the paper and slides:

A big thank you to Alwin and Sytske of collectorz.com for doing the video. You can read Alwin’s excellent software marketing blog at alwinhoogerdijk.com.

Feel free to embed this video, as long as you include a credit and a link back to this blog.

How many of these mistakes have you made? How many are you still making?

microisvcentral.com

MicroISV blog aggregator planetmiscroisv.com has died, for reasons unknown (Floyd, if you are reading this, I hope you are OK). Glenn Rice of backupbrain.com.au has kindly filled the gap with new aggregator microisvcentral.com. Thanks Glenn! Hopefully he will be able to fix the problem that is causing posts from this blog to not be displayed properly.

Running a microISV

microISVConsumers and businesses are being more careful with their money now, but they are still buying software if it will save them time and/or money. If you have been laid off in the current recession, perhaps now is a good time to start that microISV you have been thinking about. But starting your own business can be a bit daunting if you haven’t done it before. What is actually involved in the day to day running of a small software business?

Disclaimer: The information below is based on my my experience of running a microISV as a UK-based limited company for 4 years. It is far from comprehensive and is merely intended to give you some pointers. I am not an accountant. I am not a lawyer. Some of the information will not be relevant to businesses based outside the UK.  Seek appropriate professional advice.

Accountants

Probably the first thing you should do when you decide to go into business is to get an accountant. An accountant will be able to advise you on bookkeeping, tax, VAT, company rules and regulations and any number of other topics. As you aren’t a large or publicly listed company they don’t have to be a chartered accountant. Changing accountant later may be painful, so try to get it right first time. Ideally try to find your accountant by personal recommendation and someone you think you will get on with. Everything can be done by phone and email, so they don’t have to be in the same town.

Setting up a company

You don’t have to have a company. But it does have some advantages:

  • It makes it easier to separate your personal and business finances, which can only be a good thing.
  • It gives you some legal protection. If someone decides to sue due to a bug in your software, they will have to sue your company, rather than you personally. So you have less chance of losing your house.
  • It has some tax advantages.
  • You can impress members of the opposite sex by putting ‘Director’ on your business card.

Having a company also has certain obligations, such as filing annual returns and company accounts. Much of it can now be done online. The company annual return is pretty straightforward. You just need to list who the company officers and shareholders are. The tax return is more complicated and something I wouldn’t want to do without the help of an accountant.

Setting up a limited company in the UK is fairly easy, simple and cheap. In theory you could read all the necessary documents and do all the paperwork yourself. But surely there are better uses of your time when you can get an accountant to do it for you for as little as £90.

Banking

When you choose a bank you need to consider:

  • Charges – per month and per transaction.
  • Services – e.g. foreign currency accounts.
  • Customer service – how long will you have to wait on the phone to speak to someone?
  • Convenience – you don’t want to have to drive to the next town to pay in a cheque.
  • Interest – are their rates competitive?
  • Guarantees – is the money guaranteed if the bank goes bust?

It may also be a good idea to choose a separate bank from your personal bank, to keep your business and personal finances separate. This could also be important if you ever got into a dispute with your bank.

Having had very good experiences with HSBC through FirstDirect, I chose HSBC for my business banking. However I was unimpressed by the service I received. This included queuing 40 minutes to pay in a cheque and calls to the branch 2 miles away being routed via India (I got fed up of spelling out H-i-g-h W-y-c-o-m-b-e). I was also irked by the service charges. £0.60 to pay in a cheque! When I told them what I thought of their service they made an appointment for someone to come and see me. They never turned up. No apology, nothing.

I have since switched my banking to Alliance and Leicester business bank. I have been happy with the service and there are no charges as long as you pay in at least £1,000 per month. I can also pay in cheques at any Post Office (if the UK government doesn’t close them all).

Invoices

If you are selling to other companies, rather than just consumers, you will have to deal with invoices. Invoices are a subject of mystery to many developers, but really they are just a note to someone that they owe you money. In theory the sequence is:

  1. Customer asks for a quote.
  2. You send a quote (include an expiry date).
  3. Customer sends a signed purchase order.
  4. You send the software licence key with an invoice.
  5. Customer pays the invoice within the time specified by the invoice.

Yeah, right. In reality many companies pay months late. This helps to improve their cash flow at your expense. But, according to Hanlon’s razor, one should ‘Never attribute to malice that which is adequately explained by stupidity’ and I am sure that the apathy and incompetence of accounting staff is also a large factor.

The invoice itself is nothing special. It should include:

  • The word ‘INVOICE’ in large letters.
  • Your company details (including your VAT details, if registered).
  • A unique invoice number.
  • The date.
  • Customer details, including their purchase order number.
  • A description of the product sold and the price (including the currency).
  • Details of how to pay, e.g. your SWIFT/IBAN code and/or who to make the cheque payable to.
  • The payment terms (typically 30 days).

You might want to number your first invoice 0100, rather 0001, if you don’t want early customers to know you are a newbie.

Dealing with the late payment of invoices is a whole topic on it’s own. Personally I don’t invoice for payments of <£100 or $200 – it just isn’t worth the hassle. And I always pay my bills on time. It is the right thing to do.

Bookkeeping

Don’t fight the system, you can’t win. Computing is <70 years old. Accounting is as old as recorded history. Suck it up and learn the appropriate terminology. Consider doing a class on basic bookkeeping.

An accountant is not a bookkeeper. They may agree to do your bookkeeping, but it is likely to be expensive. Personally, I do my own bookkeeping. It is a bit tedious, but it means I know exactly where every penny goes and I can listen to a podcast at the same time to alleviate the boredom.

I started off using Excel for my bookkeeping. In retrospect this was a mistake.

  • You are on your own when it comes to generating reports, such as profit and loss.
  • Mistakes are easy to make and hard to find in large Excel spreadsheets.
  • Excel doesn’t scale very well to hundreds or thousands of transactions.
  • Your custom Excel spreadsheet is much more difficult (=expensive) for your accountant to work with than the package he normally uses.

Sales receipts, advertising, salary, dividends, ISPs, postage, stationery, professional fees etc.  can add up to a lot of transactions. Even with sales batched up into weekly blocks, a one man business such as mine can easily generate over 600 transactions a year. You really don’t want to be trying to track all this in Excel. Much better to use a purpose-built accounting package.

The market leading package for small businesses worldwide appears to be Intuit Quickbooks. Others are Sage (popular in the UK) and MYOB. I recommend you chose whatever package your accountant is happiest to work with. Get your accountant to set it up for you. Trying to use a personal finance package, such as Microsoft money, to run a business is almost certainly a bad idea.

I switched from Excel to Intuit QuickBooks. Initially I hated it. But once I accepted that it was written for bookkeepers, not software developers, we reached a grudging acceptance of each other. Now I just spend an hour or so updating Quickbooks every 1-2 weeks and making sure it tallies with my bank statements. I then send my accountant a copy of the database at the end of each financial year. He then uses this data to create the company annual accounts and tax return.

Don’t leave the bookkeeping until the end of the tax year. You will end up with hundred of scraps of paper to match up with hundreds of transactions. This is an N^2 problem. As with any polynomial problem, you should try to keep N small. Also, your accountant has lots of other clients and won’t thank you for asking him to create your annual report by midnight to meet the filing deadline.

Try to get a receipt for everything. I number receipts sequentially, write that number on the receipt and include it in the Quickbooks transaction memo. I then file the paper receipt in a folder partitioned by month. This should mean that I can easily find the appropriate receipt if (when?) I get audited by the tax man.

In my experience it is common to be invoiced for the wrong amount or twice for the same things. Some companies will even try it on by invoicing you for things you didn’t agree to buy. So check every incoming invoice. Companies don’t appear to put their best, brightest and most cooperative in the accounts department.  Get used to it.

Managing cash flow is a huge issue for businesses. Any number of healthy and profitable businesses have gone to the wall due to cash flow problems. This shouldn’t be an issue for most microISVs as we don’t have to spend a large proportion of our income on equipment or maintain expensive inventories. Hooray for software.

Currencies

I accept payment in various currencies through PayPal. PayPal charge a 2% fee for converting these payments to pounds sterling on top of their other fees. I have previously looked into opening a US dollar account, but it didn’t seem worth the hassle or expense. The Alliance and Leicester Bank charge a £10 fee to cash a cheque in US dollars.

Tax

MicroISVs, like other one-man limited companies, typically pay themselves a minimal salary (around 5k per year) and the rest as dividends. This means that no income tax is payable on your salary. Instead you pay corporation tax on the dividends. As corporation tax is typically lower than basic rate income tax, this is more tax efficient. However you still have to pay higher rate income tax if your income exceeds the higher rate income tax threshold.

Whenever I pay a dividend I transfer the amount of corporation tax that will be due on the profit to my business reserve account. At the end of the tax year I then know I have enough in this account to pay my corporation tax.

If you sell more than £67k per year (currently) of goods inside the EU you must register for VAT. If you sell less than this, registering for VAT is optional.

Advantages of registering for VAT:

  • You can claim back VAT on all purchases.
  • Not having a VAT number may make you seem ‘not a real business’ to other businesses.

Disadvantages of registering for VAT:

  • You have to charge VAT on all sales inside the EU. Businesses can claim this back, but consumers can’t.
  • More paperwork.

Consequently a B2C software vendor with large profit margins probably shouldn’t register until they have to. But VAT registration might be much more attractive to a B2B software vendor with lots of expenses. Apparently you can claim back some of your VAT payments retrospectively when you register.

Some other points on tax:

  • You can give your spouse shares in the company and pay them that proportion of the dividends. This is tax efficient if they earn less then you. But will only add to your woes if they ever run off with the milkman/milkwoman.
  • When you are applying for a mortgage some banks will only count your salary, not your dividends. A £5k salary doesn’t go far, even in the current housing market.
  • If you work at home you can charge a percentage of your heating, electricity, council tax etc or rent part of the house to your company. But you may then be liable to pay capital gains tax on any increase in value of the house.
  • In the UK you can claim £55 per week tax-free in childcare vouchers. The childcare provider must be registered with OFSTED. You don’t need a physical paper voucher – just pay the childcare provider direct from your company and keep all the appropriate records (including their OFSTED number).
  • The UK government pays a reasonable rate of interest on early payments of corporation tax. You might get more interest paying your corporation tax early than leaving it in a savings account. Also you don’t have to worry about the bank going under with your savings. Of course you will still have to pay tax on the interest next year.
  • I have also written an article on the basics of VAT for software vendors.

Additional resources

  • UK Business Link. Business link is a free business advice and support service, available online and through local advisers. Useful for generic business advice – don’t expect them to know anything about the software business.
  • UK Companies house. Where you go to set up your company and make annual returns.
  • UK HM Revenue and Customs. They have always been very helpful when I rang them with a query.
  • Andrew Wells. The accountant I use. Good service at a reasonable price. UK based.