CHAIN REACTION: Bike shops working below the VAT threshold - BikeBiz

CHAIN REACTION: Bike shops working below the VAT threshold

Small is beautiful? There has been some discussion on the BikeBiz forum about the viability of running an IBD with a turnover below the VAT threshold. Jake Voelcker explains how Bristol-based Jake’s Bikes now employs two full-time staff, yet remains under the magic £70,000 annual limit...
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It is a commonly held belief that a cycle business cannot be run profitably on a gross annual turnover as low as £70k. Many contributors to the BikeBiz forum have expressed doubts that any cycle shop with a turnover below the VAT threshold represents a viable business at all.

There are exceptions. Steve Barnett, owner of IBD Cycle On in Lancashire, says for his business the key was “to steadily increase the bottom line whilst not allowing the turnover to go above the VAT limit”. But there is little evidence of this model working for anything other than small IBDs with one owner-manager-mechanic. Some have questioned whether a turnover of even £200k is really sufficient to pay two full-time wages.

However, by going back to basics and having more in common with the archetypical bike shop as it was 75 years ago than anything modern, Jake’s Bikes now pays two perfectly respectable full-time wages on a gross turnover somewhere in the region of £65k.

How do we do it? First priority is to keep the overheads low. We have cheaper premises than average (we’re central but not on a High Street, and we don’t have a shop front); we spent almost nothing on workshop fittings, using salvaged and recycled materials throughout; and we’ve relied on word-of-mouth instead of paid advertising. Crucially, we have no bank loans so no interest to pay. We don’t even have a card machine because the overheads are too high.

Secondly, we concentrate almost entirely on servicing and repairs, where margins are high and overheads are low compared to retail. We’re now so busy that we work by appointment only; we have virtually no passing trade–it’s all bigger workshop jobs. We also keep a large stock of used parts: a £20 used component means £15 to £20 gross profit, whereas on a typical 50 per cent margin a £20 new parts sale equates to only £10 gross profit for the same turnover.

Thirdly, we sell used bikes instead of new –something else that seems to have gone out of fashion, but the business logic is sound: if we sell a used bike for £175 we might make a £75 profit. If we sell a new bike for £300 on a 35 per cent margin, that’s still only £75 profit, but it pushes up both outlay and gross turnover. For this reason we’re not part of Cycle to Work, either.

There are several advantages to not being VAT registered. There is less bureaucracy and less bookkeeping. Consequently we don’t use an accountant, saving time and money. Steve Barnett says he suspects that there is a more or less direct relationship between turnover and stress – so if you want a hassle-free business, keep it small. For example, we don’t work at all on weekends. How many small bike shop owners have two whole weekend days off every week?

Another advantage is that our labour charge is 15 per cent cheaper without affecting our gross margin at all, simply because there is no VAT for customers to pay. Alternatively, if we chose to increase our prices to an average level, we could effectively pocket the VAT as profit, earning 17.5 per cent more than a VAT-registered business would.

I’m not necessarily ruling out the expansion of our business as demand grows: for example, there is scope to employ a receptionist/admin assistant to allow me to spend more time in the workshop. But the leap is huge: to pay a third person’s wage, swallow the cost of adding VAT to our prices, cover the extra accountancy costs, and continue to pay ourselves wages, we would have to more than double our turnover. That sounds like a lot of extra work for little gain. In the end we might just decide to keep the business the way it is.

DO THE MATH
Annual rent; business rates; utility bills £5,500
Insurance £400
Stock purchasing (inc. VAT) £19,000
Purchasing used bikes for repair or parts £3,000
Tools, workshop equipment etc £1,000
Mechanic’s wage (inc. employer’s NI) £17,000
Stationery; website; phone bills £600
Total Outgoings £46,500
Gross turnover £70,000
Total outgoings (see above) £46,500
Net profit £23,500

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