In our final part of our series on how to start a business, we take a look at everything you need to know about finances. As well as budgeting and tax, we also explore forecasting and funding.
So far in our series on how to start a business, we’ve examined a variety of considerations for getting set up. You can check out part one on planning, part two on structure, part three on people, and part four on marketing. In this final article, we take a look at managing finances.
One of the most crucial aspects of starting and running a business is understanding how money works. Business finance is different from personal finance, so whether you’re a sole trader or limited company, you need to know what your responsibilities are. We take a look at all of the essential details.
Creating a business budget
Perhaps the most important aspect of figuring out your finances is to create a business budget. In another article, we explored how you can set up a personal budget. Many of the principles are the same; however, there are several notable differences when it comes to your business.
Your main aim in creating a budget is to understand how much it’s going to cost to get your business set up. Obviously, this means that no two budgets are going to be the same, as it’s highly dependent on your niche and business plan. That being said, there are some costs worth considering:
- Business premises costs. This will vary depending on whether you’re renting or purchasing. Also consider your utilities, internet access, and other similar fixed costs.
- Equipment costs. Take into account any specialist equipment you’ll need, such as tools and machinery. In addition, you may need phones and computers for you and your staff.
- Vehicle costs. If your business plan requires you to purchase or rent a vehicle, this needs to be considered. Don’t forget to include the costs of fuel and maintenance.
- Staff costs. As well as paying people, you also need to think about the costs of hiring and onboarding them.
- Advertising and marketing. In our previous article, we discussed the importance of branding and marketing. Based on this information, you’ll need to take into account how much your activity will cost. You’ll most likely want to think about website design and hosting costs.
Once you’ve outlined these costs, you’ll need to work out how much your personal living costs are in terms of rent and bills etc. Ultimately, you need to balance the cost of starting a business with how much you can invest. If you don’t have sufficient capital, you may need a loan or investment.
Understanding tax and VAT
Owning a small business or operating as a sole trader or partnership means that you have certain tax responsibilities. Unlike when you’re employed, you’ll likely have to file accounts and paperwork and pay your tax and National Insurance manually.
Business tax is a complicated topic, and it’s worth getting up to speed with the exact details and how they apply to you. The amount and rate you’ll pay depends on a whole host of different factors, including your earnings, the type of business you have, and how you pay yourself. However, there are some points worth bearing in mind:
- Registering for Self-Assessment. The process of paying tax on your self-employed earnings starts with letting HMRC know you need to send a return. Whether you’re a sole trader, company director, or limited liability partner, you’ll need to complete this process.
- Don’t forget National Insurance. As well as paying your own tax, you’ll also need to make your National Insurance contribution. As with tax, this is paid in arrears, meaning you’ll pay both NI and your tax the year after your earnings (e.g. in 2022 you’ll pay NI and tax for 2020/21).
- Paying corporation tax. Those who operate either a limited company (Ltd) or a limited liability partnership (LLP) will also have to pay corporation tax. This is based on your annual profits.
As well as your tax, you’ll also need to take into account VAT. If your business has a taxable turnover above £85,000, you’ll need to register for VAT. In doing so, you’ll need to calculate VAT when you’re charging for your goods/services. It also means you’ll have to complete a fair amount of extra paperwork. However, once you’re VAT registered, you can claim back VAT on any goods or services you purchase for your business.
Managing your accounts
Part of being self-employed is understanding how your accounts work. Depending on the type of business you’re running and your turnover, you may want to hire an accountant to help with this. Either way, you’ll need to keep your own records for things like income, payments, expenses, and other financial activity. As well as bank statements and invoices, you should also file your receipts and similar.
Many business owners choose to hire an accountant. They can help you make sure you pay the right amount of tax and meet deadlines, as well as give advice and information. If you’re a sole trader, it’s unlikely that you’ll need to pay an accountant each month – once a year during tax season should suffice.
As well as an accountant, you may want to invest in some accounting software. This can help you keep on top of your accounts and finances, as well as make it far easier to submit your tax return. If you run a limited company or limited liability partnerships, you’ll have to submit your accounts and file a confirmation statement each year.
If your company turns over less than £150,000 per year, you can manage your accounts and pay your tax on a cash basis, which can be beneficial.
Business banking options
A business bank account can be a useful tool for keeping an eye on your finances. When you’re working on starting your business, it’s a good idea to get your banking set up so that you can send and receive money.
Those who are starting as a sole trader or in a partnership aren’t required to have a separate bank account. However, it can be a good way of keeping your personal and business finances apart. Those operating a limited company are required to have a separate bank account.
The bank and type of account you choose will very much depend on your personal choice. However, you should do your research to find out whether or not they cater specifically to your needs. Some considerations to bear in mind include:
- Whether they provide services for businesses of your size
- What their fees are like in terms of monthly payments and transaction costs
- Whether they offer perks for joining, such as insurance or accounting software
- How much it costs per year, and whether the initial period is cheaper
- What their fees are for foreign currency transactions (if you do business overseas)
Key financial information
Whether you’re using an accountant or not, there are several key reports that you need to understand. These financial statements can give you a measure of your business’ financial health, so it’s worth knowing what they mean. There are three main ones to get to grips with before you start a business:
Income statements (also known as a Profit and Loss statement) are a record of your business’ income and expenditure over a certain period. It shows you how profitable your business is during that time. It’s a useful document to understand, particularly when it comes to applying for business finance or investment.
Cash flow report
A cash flow report shows how and when money moves through your business. As well as showing the actual cash you have available, it also outlines when regular payments are due, and whether or not your business can make those payments. As we’ll see, planning for this cash flow is essential to keep things running smoothly.
For an overall view of your business’ financial health, a balance sheet is a useful document. It outlines your assets, what you owe (liabilities) and how much has been invested into it (equity). With this sheet, you can see how valuable your assets are, how your business is being funded, and how much of a risk you are to investors.
Forecasting and analysis
Forecasting plays an important part of starting a business. Many of your decisions will be made based on your predictions for how well your business will perform. However, it’s not something you can just make up. You need to create an informed guess based on the available data and research. You’ll then need to analyse how successful your efforts are.
A well-thought-out forecast can help you plan for your business launch and future. Similarly, it can help you decide where you should spend your money to develop your company. It also enables you to anticipate changes in the market.
Here are some points to bear in mind when you’re creating a financial plan for your business:
- Gather your data. As you won’t have any existing sales figures, you’ll need to rely on other data. Your market and competitor research can come in handy here, as you’ll want to see how similar products/companies perform. Try speaking with vendors and wholesalers to get their input too.
- Start with expenses. It’s far easier to forecast your expenses at these early stages, so keep in mind your fixed and variable costs. As well as costs like rent, bills, insurance and advertising, remember things like labour and material costs.
- Use conservative and aggressive figures. You’ll want to have a best-case and worst-case scenario in mind when you’re forecasting. The former gives you something to aspire to, while the latter makes sure you prepare appropriately.
- Describe your sales strategy. How are you going to get people to buy your product or service? Are you selling directly, via a website, or through wholesale? Do you have a sales team? Answering these questions can help you, and investors, see how you’re going to hit your forecast.
To determine how accurate your forecasting is, you’ll need to also prepare for some analysis. When it comes to measuring success, there are numerous ways you can review your progress. When it comes to your finances, this is where your key financial information comes in particularly useful.
You can use your financial reports to compare how accurate your forecasting is. In doing so, you can accurately measure how well your business is performing against your expectations and goals. It can help to identify trends in your cash flow, your level and turnover of stock, how much you owe and are owed, and many other factors.
Of course, there are other ways you can analyse your business aside from just looking at financial reports:
- Web analytics. If you have a business website, you can get insight into how your customers are interacting with it. As well as understanding your conversion rate and total sales, you can also see where customers are coming from and where they leave. Check out our introduction to Google Analytics for more info.
- Marketing analytics. Insight on how your marketing activity is performing is essential for making adjustments to your strategy. It gives you the chance to measure how effective your brand and customer assets are, as well as understanding the lifetime value of your customers.
Funding your business
One of the main issues faced by those wanting to start a business is how to finance the venture. It can often seem like an impossible task to start making money without having some in the first place. Thankfully, there are several business funding options available to help you get started. Below, we’ve highlighted just some of them:
You may choose to self-fund your company using money you’ve already saved. If you’re looking to maintain full control of your business, this is often a popular method. However, depending on your ambitions, you may need a fair amount of money, which can run out quickly.
In some cases, you might be able to borrow money from friends or family. Although your legal responsibilities are often limited in this situation, it can risk your relationship if things don’t go to plan.
In the UK, there are a number of business grants on offer. These essentially provide free money that can help your business get up and running. Often, these grants are used to support the economy or promote innovation in particular fields. You can check out the UK government website for more information on business grants.
Although this option can give you anything between £1,000 and £5,000,000 to start a business, it’s far from a simple process. It can be a time-consuming process to apply and provide all of the necessary evidence.
There are several investment options that are worth thinking about when you’re starting a business. Usually, you’ll give a certain percentage of your business control or equity to the investor in exchange for money. Here are some of the methods of securing investment:
- Angel investors. This is a term used when wealthy investors provide money to help a business get started. Often, this means giving a percentage share of your company to the investor.
- Venture capital. Professional investors are known as venture capitalists. They make their living by investing money into a variety of companies to make a profit. For startups, this type of investing is usually limited to those developing advanced technology.
- Crowdfunding. With this form of investing, you raise small amounts of money from a large number of people. Often, you provide a small reward to each investor once your project is off the ground.
Many banks offer loans specifically to those starting a business. They often work in the same way as personal loans – you borrow a set amount and pay it back, with interest, over a certain period of time. Although it can be a good way of securing funding initially, it does mean you take on some risk. You’ll have to pay back a loan no matter how successful your business is.
To take some of the risk away, you can instead apply for a government-backed Start Up Loan, which comes with support, guidance, and mentoring as you’re getting your business started.
That concludes our series on how to start a business. Over these five articles, we’ve covered many of the fundamentals you need to know when you’re trying to get up and running with your own company. It’s a process that may take some time, but it’s worth being thorough with.
Over each of the articles, we’ve included links to some useful courses that can give you further information. With these, you can learn in greater detail about some of the key skills you’ll need to make your business a success.