When you’re setting up your new business, one area it’s very important to take good care of is your finances. That includes keeping track of your income, running costs, and making sure you pay the right amount of tax at the right time. Emily Coltman, author of plain English guide “FinanceforSmallBusiness” and Chief Accountant to FreeAgent – who provide an online accounting software system designed for freelancers and small businesses – gives ten steps to take to make sure your new business’s finances don’t cause you any headaches.
This may sound odd in a series of financial tips, but it’s very important as it will impact on a lot of the issues that crop up later down this list.
Would you like to have your hobby earn enough money to pay for itself? Do you want to earn enough to run your home and feed your family? Or would you like to be the next Anita Roddick?
Whatever answer you give will determine a lot of your financial choices.
A business in the UK can have one of four different structures:
Sole trader is the simplest, when the business is just you, your computer and your dog. There’s no legal difference between you and your business, which makes it very easy to take money out of your business, but means that if your business is sued, you can lose personal assets like your home and your car.
A partnership is just like a sole trader except that there’s more than one person involved. If the business is sued any and all of the partners could lose their personal assets.
A limited liability partnership is a separate legal entity from its owners – its owners wouldn’t lose their personal assets if the business is sued unless they’d been guilty of wrongdoing, but there is a lot more paperwork involved.
A limited company is a very popular structure as not only are your personal assets usually safe but potentially trading through a limited company can save you tax, however again there is a lot more paperwork and legal responsibilities involved.
The reason why you are in business will play a large part in helping you choose the most suitable structure for your business. If you don’t mind a more complex structure if it saves you tax, you might choose a limited company. However, if you want to keep everything really simple, you’ll probably choose to be a sole trader.
Recording your income and running costs can be tedious but it’s something you will have to do as a business owner, no matter how small your business is, and the longer you leave it the harder it gets. I recommend starting the moment you spend any money on your business, rather than waiting for your first sale. If you don’t do this, you could lose receipts for costs, forget about that cost and pay too much tax!
Once you’ve started keeping your books, update them regularly – to not only save a rush when it’s time to file your tax return, but so that you have access to good information about your business.
This information might be how much profit your business is making, or how much cash it’s bringing in and how quickly. And remember why you’re in business: whether you want to make more profit or just let your business wash its face, you won’t know how your business is performing if you don’t keep up-to-date records.
Do you want to grow your business or just keep it ticking along? This may well determine whether or not you need funding, and where it might come from. Family and friends, your local bank, a business angel, and crowdfunding are all possible sources of funds for your business – but remember that some of them might want to see a business plan, or to own part of your business, before they give you the funds you require.
Businesses only have to register for VAT if their taxable sales – sales which would be subject to VAT – are over £73,000 a year. You can register before then if you wish, because as well as charging VAT to your customers you can claim back some of the VAT which you pay on your suppliers’ bills, so by registering early you may be able to claim back VAT on large costs. But registering for VAT brings an extra layer of complication to businesses as you’ll have to file a form with HMRC four times a year. If your customers are mainly members of the public, registering for VAT also means your prices will be higher from their point of view.
If you don’t get paid your business can’t survive. Many small business owners are too kind to their customers when it comes to payment terms, because they’re worried about losing customers, but a bad customer is worse than no customer. Trust me, I’ve tried!
Consider asking your customers for payment up front, either in full or in part. If you do this, keep your customers happy by offering them a full money back guarantee if they’re not happy with your service.
Don’t undervalue yourself. “If you’re in business because you want your hobby to pay for itself, it’s easy to end up setting a price that is lower than it should be. After all, your hobby is likely to be your passion and you’ll do anything to keep doing it – including undervaluing the hard work that you’re putting in. Remember that customers want what you’re offering or they wouldn’t buy from you, and people may not value what they either don’t pay for or pay a low fee for. Don’t be the cheapest – be the best!
If your business is very simple, run as a sole trade, you may not need an accountant. But even then there will be tax pitfalls you may have been unaware of. A good accountant will not only make sure your records are in apple-pie order and keep your business on the right side of the taxman, they will also help you save tax and offer proactive advice for your business. Shop around among your small business contacts for recommendations for an accountant, and if the accountant talks gobbledygook at you, walk away. Good accountants are fluent in plain English!
Remember, why are you in business? Do you want to grow into new markets, or start selling new products? If you would just like your business to wash its face, how happy are you that your existing customers will stay with you?
Plan how much profit you expect to make and how much cash you think will come in. If you run out of cash then your business will struggle to survive. But remember, this is a plan, not an exact prediction – you are not Mystic Meg!
Setting up a business does involve jumping through a lot of financial hoops, but it’s well worth it, because accurate up-to-date records not only ensure you pay the right amount of tax at the right time, but also provide lots of very useful information to help you run your business – no matter how big or small it is.
Emily Coltman ACA joined FreeAgent as its Chief Accountant in 2009. Passionate about very small business and keen to help small business owners have as few financial hassles as possible, Emily speaks two languages – accountantese and plain English. She published her ebook Finance for Small Business in August 2011. Emily graduated from Cambridge University in 1998 with an MA in Music and qualified as a Chartered Accountant in 2003. FreeAgent would like to offer working mums a 3 month free trial. To take up the offer please register at freeagent.com/FREE3.