Starting up your small business – financial considerations

Starting up a new business can be a whirlwind. Planning, funding and setting up is daunting but can be streamlined considerably with the correct processes in place. The likelihood of a business failing is far smaller when you spend time monitoring and tightening up your plans. Developing your financial plan is one of the first things you should concentrate on.

1) Choosing the correct structure
Structure your business with tax breaks in mind. Selecting the correct business structure is one of an entrepreneur’s biggest decisions when starting up – the entity you choose can have significant impact on the way you are protected by law and the tax rules you will be required to adhere to. But which is best? The choice between the sole trader and limited company routes usually divides the majority of the audience. Many new, small businesses begin life as sole traders as a matter of simplicity – there are no Companies House filing requirements, and profits and losses are returned annually to HMRC via your tax return. While accounts must follow accepted accounting practices as sole traders, there are no exact requirements laid down by law. However, as a business grows this option often becomes unsuitable. This is mainly due to the fact that with growth comes extra liabilities which a sole trader will be personally accountable for. A limited company can often be safer, especially when a business is growing as if it runs into problems you only stand to lose what you have invested into the company. As profits rise, this option can also be more tax efficient. It is for these reasons that many new businesses eventually make the move to become a limited company. Partnerships, where a number of individuals go into business together, and LLP’s can also be considered but tend to be less popular for new businesses.

2) Registering with tax authorities
When setting up, there are a number of authorities you will need to register with, depending on your choice of business structure. It is vital that you do this as soon as possible to avoid problems and penalties down the line. HMRC is the main body you will be dealing with for tax, National Insurance Contributions and VAT matters. Most of this work can now be completed electronically to cut down on paperwork so there’s no excuse for delays. If you’re struggling to fill in forms you should always seek help from an expert. You should also make sure you are familiar with the tax calendar; keep a copy in your office or at home so you can refer to it.

3) Long term goals
As silly as it seems, having end goals in mind during the inception of a business is essential. Beginning with an exit plan in mind is instrumental when developing a sound financial strategy. Every process should be guided with one eye on the exit and, as a result, contingency plans must be put in place. Your financial activities will vary considerably depending on whether you are setting up a long term business to pass through generations, or simply priming one for a future sale.

Long-term funding requirements must be considered from the outset – if you know you are going to need investment from business angels and venture capitalists, often using schemes such as the Enterprise Investment Scheme (EIS), it must be planned for – what path are you going to go down to get this investment and how will you do it? Will it affect your finances? Make sure you know what questions you should be asking by seeking advice.

4) Cash is king
For small businesses, managing cash flow is vital, yet can be forgotten about on an on-going basis. Often, there’s a false belief that all will be well as long as the accounts show a profit at the end of the year. Unfortunately cash and profitability are not the same thing. The ability to collect cash and pay bills, employees and owners is the lifeblood of every business and continues to be a major headache for SME’s. Large corporates are squeezing smaller businesses with longer payment terms – while it used to be an average of 30 days, big companies in some cases are now putting in place payment terms of up to 90 days. This adds a huge strain on finances and makes it difficult for small firms to refuse for fear of losing a contract. In addition, large suppliers are often tightening their payment terms so smaller companies are required to pay up in much smaller timeframes. Small business must have extremely tight credit control, forecasting, and cash planning processes in place in order to maintain their cash flow needs.

5) Software and support
The decisions you must make during the first couple of years of your new business can be overwhelming. Appointing an expert advisor is extremely important and can be the difference between poor and great financial decisions. One of the biggest mistakes small business owners make is not keeping a tight control on their financial reporting. As a result, they can end up making poor business decisions or lacking evidence when seeking additional investment or help from the bank. Many small business owners attempt to manage their finances independently but it’s advisable to have a professional on board from the outset to advise you on all stages throughout your business’ lifecycle and provide bespoke solutions to issues.

Dedicated accountancy software is also worth considering as it can be tailored to the needs of your business. As your business grows, you should work closely with your accountant or advisor to continually monitor the type of software you are using and consider if it still fits your needs. Cloud based accounting software, such as Xero, allows you and your adviser to stay on top of financial reporting. As this uses real time information, you can access your accounts on the move, from anywhere in the world.