This week’s guest post comes from David Hughes:
Forming a business is the easy part. Sustaining it, however, is another matter, considering the fact that 50% of newly formed companies fail in their first year. Out of those businesses that survive, only one in 20 will still operate after five years.
The chances of failure are alarmingly high. Entrepreneurs, however, don’t mind these odds as they continue to form new companies every year. True, you’re never sure if your business will survive and prosper especially during an economic slowdown. You can, however, increase your chances of success.
While running a business requires your full attention, you need to keep an eye on your finances. After all, it doesn’t make sense running a business for the sake of yielding poor profits. Unfortunately, this is a fact that many business owners fail to grasp.
So how do you keep your finances in order?
Here are several accounting tips you need to keep in mind when forming and running a new business.
Understanding Start-up Costs
When forming a new business, you often incur start-up costs. These are one-off payments that are grouped into two types:
- Investigatory – These are the costs incurred during the market and product research phase. These include transportation, labour or hiring, consultancy fees, and cost of making deals with potential suppliers or distributors. At this stage, you haven’t formed the company yet. You’re still exploring the feasibility and potential income of the business.
- Pre-launch Costs –These are expenses usually incurred for the launching of the company. By this time, you’re now ready to sell the products or services. The costs include advertising, rent deposits, staff training and salary.
Fixed vs Variable Costs
Once the business starts to operate, you’ll incur two kinds of costs – fixed and variable.
Fixed costs are expenses you have to pay regardless if your company made money or not. Here are some examples:
- Salaries and fees
- Equipment and supplies
Meanwhile, variable costs are expenses that can increase or decrease depending on the number of sales generated or production rate. These include:
- Actual cost for each product produced
- Sales commissions
Benefits of Hiring an Accountant
Hiring an accountant will be advantageous to your start-up company. This particular professional can provide your business with:
- Financial knowledge and insight
- Eyes to detect potential financial troubles
- Advice on how to deal with tax legislation, PAYE, NI benefits and other payables
- Updates regarding changes in government legislation that can affect your business
- Ways to maximise the growth potential of your business
London-based Accountants 4 Small Business offer a range of services such as these..
Acquiring Basic Accountancy Skills
Having an accountant will improve your company’s financial management. Still, you need to learn even the most basic accountancy skills. You don’t have to do the bookkeeping yourself. Instead, you should learn basic financial management skills as well as accountancy ideas and terminology. By taking the time to learn these skills, you can:
- Determine the net worth of your business
- Understand basic accountancy terms like cash flow and profit
- Communicate effectively with accountants, employees, investors and investors
- Make well-informed decisions and apply strategies suited to your business
- Gain insight from your competitors by reading and understanding their annual financial reports
Learning these basic accountancy skills require little or no money at all. There are plenty of resources that are free and available to read online. You will, however, need to devote your time to this subject.
Choose a Suitable Business Entity
Now it’s time to decide what kind of business entity you’re going to set up and register with HMRC. Here are the kinds of trade options you can create:
a. Sole Trader or Partnerships
Setting up a business as a sole trader or partnership is the simplest way. Here are some of their advantages:
- You only need to register with HMRC
- You don’t have to publish your accounts in public
- You only pay the tax based on the profits you make
There is, however, a disadvantage. You have little protection against creditors and unlimited liability. If your business has acquired debts, creditors can go after your personal assets.
b. Limited Company
Registering your company under this setup will mean:
- More regulations to comply with
- You have to register with Companies House
- Informing HMRC how many people you employ
Just like sole trading and partnerships, you’ll still pay income tax and national insurance. In addition, your company needs to publish an annual basic financial report. You should also take note that this data is accessible to the public. In return, your company enjoys:
- Limited liability
- Protection of personal assets
- Better access to credit, compared to sole traders and partnerships
Adopting an Accounting System
You need to choose and use an accounting system that will provide accurate financial details. Be aware that fines and penalties are imposed for:
- Erroneous and incorrect record keeping
- Late submissions of returns and accounts
You also need to consider a suitable system that can handle all your accounting data. Do you prefer:
- Handwritten ledgers or accountancy software?
- Cloud computing or simple spread sheet?
Many companies today favour using cloud computing. It’s a convenient way for sharing data with your accountant who can check and verify it regularly. Online accounting also allows you to file and pay your VAT returns electronically. In addition, companies that pay VAT online are rewarded with longer payment deadlines.
Entrepreneurs also need to invest in reliable accountancy software run by knowledgeable accounting or bookkeeping staff. Remember:
- The software can only give out results that are based on the data input.
- Some software can be pricey and may also require regular paid updates.
- You’ll need qualified staff to run complex software operations.
- If you or your people don’t have much experience in bookkeeping, better adopt a manual spread sheet system. While this process is time-consuming, the records are easier to update and understand.
Making profits is not enough for a business to succeed. You also need to exercise proper financial management as well as an accurate accounting of transactions. By adding a reliable accountant to your team, you can keep an eye on the sustainability and profitability of your business.
David Hughes is the Managing Owner/Director of Rodliffe Accounting. He has over 15 years of experience working with small business owners. He offers specialist accountancy services, including business planning and bespoke tax strategies.