Developing an idea is crucial, but what about the ‘backroom’ side of starting a business – registering it, getting finance, hiring employees and being on top of tax and accountancy?
Here’s a step-by-step guide for getting it right – and the pitfalls to avoid.
Registering the business
This is more straightforward than you might think, as a company can very quickly be established. The important thing is to decide what kind of company you want to be – sole trader, partnership, limited company or LLP? There are pros and cons to each – for instance, being a sole trader offers flexibility but being a limited company offers protections. If you’re going to be a registered company, you’ll need to understand corporation tax and business rates. Taking your time to decide what kind of business you want to be will provide solid foundations for the future.
Focus on the financials
Having some financial knowledge can be a distinct advantage. ‘If you have experience of preparing accounts, bookkeeping and running budgets before you come to set up the company, it will really help you,’ says Andy Fish, Director at Community Heroes. Fish was a trainee accountant for a short while, ‘but realised that becoming an accountant wasn’t something I personally wanted to pursue. However, since starting my business I have become slightly obsessed with making sure the books are straight, making sure bank statements are reconciled and making sure invoices are paid on time.’
Know your way around tax
‘VAT registration is compulsory when your turnover reaches £81,000, but registering before then can give the business a more professional and established look; this can be important in some industries,’ says Chris Sweetman, Director at Sweetmans and Partners. ‘Using an accountant can find you chunky savings, as well as act as a sounding board for general advice.’ For example, Sweetman says, ‘by registering for flat-rate VAT on our accountant’s advice, we were able to save several thousand pounds on our first year’s VAT payment. If you’re running the business through a company, an accountant can also help you reduce your tax bill by ensuring the right split between salaried income and dividend payments.’ Bear in mind that if you don’t register for VAT and then the business is more successful than you’re expecting, you will need to retrospectively register for VAT and this could be costly. Also remember that VAT thresholds are based on turnover not profit, so if you are operating in a high turnover but low-profit business, you will be liable much faster than a business that does not have high costs. An accountant will also, in the long run, save you money. ‘Knowing the allowances and thresholds, an accountant can help ensure that you don’t end up paying more tax than you should,’ says Mark Bennett, Regional Director at Ultimate Finance Group.
If you’re thinking of applying for funding for your business, lenders will want to see that you have a solid business plan, can argue convincingly that your enterprise will attract customers, that you can budget and that your personal finances are in good order. Most advice for start-ups focuses on having an innovative idea and positioning yourself against the competition – but being a sound strategic planner is also essential if you are to be a successful entrepreneur. ‘It’s well documented that some 30 per cent of Fortune 500 CEOs spent the first few years of their careers developing a strong foundation in finance,’ says Mark Bennett.
Cash flow is king
Many start-ups have been scuppered simply because they’ve run out of cash. You can have the best idea in the world and watertight plans for long-term growth, but if your cash flow is not healthy, the rug can be pulled from beneath you. ‘Accountants tend to have a great grasp of cash flow challenges and capital requirements,’ says Bennett, ‘and are often able to recommend suitable routes for businesses to finance growth plans or consolidate borrowings, whether that be through traditional borrowing, an alternative lender or equity finance.’ A good accountant ‘can be instrumental in helping a business grow, and also bring to the customers’ attention any concerns around how future changes to tax, or related legislation, may impact the way the business finances are managed.’ Cash flow projections and forecasting should be second nature to them, ‘and they also usually build up great knowledge of financing options in the market.’
Understand employment rights
As the company grows and you take on employees, this will take a significant part of your budget costs and you will need to plan accordingly. Remember that you will now need to pay into workplace pension schemes for employees, ensure you’re familiar with discrimination laws and check that your obligations to health and safety legislation are in place. Other relevant new legislation to consider includes parental leave rules and changes to the default retirement age.
Starting a business – top tips
- Don’t be afraid to ask for help. ‘Take some time to research everything you need to do or get advice if you need it,’ says Andy Fish. ‘How you run your business permeates everything you do. If you don’t run your business properly, how do you expect to deliver your services effectively? Customers will soon see through a shoddy enterprise.’
- Make good use of your accountant. ‘It’s one less responsibility for you,’ says Chris Sweetman. ‘It’s also worth thinking about having some accounting software to do basic bookkeeping. Again, this can be relatively inexpensive and some packages enable you also to send invoices, track debtors and produce basic reports. This isn’t instead of an accountant, but it will help make your life and theirs easier.’
- Be prepared for hard work. According to Fortune, up to 90% of start-ups can fail within three years. Follow these tips, and you can make sure that your enterprise isn’t one of them.
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