Businesses are generally started by enthusiastic entrepreneurs who either want to create something which can grow and has value or create a work/life balance for themselves. Whichever it is there are lots of things the business owner needs to be involved with which may not have occurred to them during the excitement of starting a business.
As a bookkeeper I know that finance is one of the most important things that a new business owner needs to understand. Some businesses will have had to create a business plan in order to obtain a loan or investment. But others will just get started without a thought of how to manage their finance.
So here are a few things to think about if you are a new business (or even an established one)
Decide on your business entity
Decide whether you are going to start as a sole trader or a limited company. Or you may be starting up with someone else, in which case you will be a partnership. It is important to understand what is involved with each in terms of accounting and the costs of using an accountant to complete limited company accounts or doing your own tax return as a sole trader. A limited company needs statutory accounts which can be costly to have prepared. Preparing a tax return is much simpler and can be done online and it is much easier to close down a sole trader company if you decide to stop trading.
Open a business bank account
Always keep your business expenses separate from your personal spending. You set yourself up for far more work if everything is mixed up together. Even using a separate personal account would be better. You will be able to track your finances so much better if everything business related is going in and out of one account because you will be able to see at a glance whether you are spending more than you have coming in.
Decide on your financial year
As a sole trader your financial year is likely to tie in with the tax year (6 April to 5 March) or for ease from 1 April to 31 March. If you start trading part way through the financial year you can still have a financial year which ends on 31 March but it won't be a full 12 months.
If you are a limited company your financial year will start from the beginning of the month in which your company was registered and your accounts will run for 12 months from that point. However you can shorten or extend your financial year once to bring it in to line with a particular 12 months which suits your type of business.
Decide how you are going to maintain your accounts
Don't wait until your first year has passed before you think about how you are going to keep a record of your income and expenses. Start from the beginning keeping track of all your spending as well as all your income. There are numerous accounts softwares available, some of which are free, which will help you to record everything in a straightforward way using your phone and an app.
If accounts is really not your thing find someone who can help you from the start. You may be surprised to find that an experienced bookkeeper will not only keep your accounts up together but will be a valuable source of advice and information to help you move your business forward. And it may not be as expensive as you think either.
Your choice of software to maintain your accounts will have an invoicing option. Use this to send out timely and accurate invoices to your customers by email. Ensure you have added payment terms and set up automatic reminders to go out to your customer if they have not paid by the due date. If you are VAT registered your invoice must contain some very specific information - you can find out what you need to show on your VAT invoice here.
You do not need to become VAT registered as soon as you set up your business. The threshold for registration is £85,000 over a rolling 12 month period. However you can register voluntarily if it makes financial sense to do so. Whilst you might have a heavy outlay on equipment which has VAT on it, you have up to 4 years to claim back the VAT on these items (as long as they are still in use). So whilst it might seem to help your cash flow to be VAT registered and receive a refund, you will have to charge your customers an extra 20%. It is important, therefore, to weigh up the benefits of being VAT registered and choosing the most appropriate time to register.
You have not made a sale until your customer has paid you. Keep track of unpaid customer invoices and chase up any that have not been paid by their due date. Have a credit control process so that your don't forget and your customers know that you expect them to pay on time. Consider using a card machine to obtain immediate payments or ask them to sign up to a direct debit option so that you can manage when they pay you.
Know your numbers
Every business owner needs to know how their business is doing. Everybody is in business to make a profit to enable them to pay themselves what they need to live the life they want to. That means that you, as a business owner, need to keep close track of your income and every one of your expenses. Know what is being paid out of your business; question each payment and be sure that it is something that you need to make your business run effectively. There are numerous softwares available to help businesses do something better or easier; if you have one or more of these be sure that they are really making your life easier or adding value and that their cost is worthwhile. The lower the costs are in your business the more profit you will make to either grow your business or to pay yourself.
Whether you are doing your own accounts or you have a bookkeeper doing them for you, make sure you have regular management accounts. A growing business should have their accounts kept up to date on a monthly basis so as a minimum you should have a monthly profit and loss report. This will compare the month with previous months and a previous year or two so that you can see how the income and costs of the business are changing and where your money is going.
Also consider which key pieces of financial information are important to you and your business and keep track of these monthly.
A survey between 2011 and 2016 showed that only 44% of businesses starting in 2011 were still in business 5 years later. Whilst there will be numerous reasons for this the biggest challenge for SMEs was Attracting Customers followed by Increasing Revenue and Maintaining Profitability. These latter two relate specifically to managing your financial affairs and knowing your income, expenses and profit. It makes sense, therefore to get your accounts set up from the start, keep track of monies you are owed as well as the expenses of your business and always know whether your business is making a healthy profit.