We were once described – by a French revolutionary – as a ‘nation of shopkeepers’. Today, we’re fast becoming a nation of business owners.
Figures from the Centre for Entrepreneurs show that almost 660,000 new businesses were set up in 2016, up more than 50,000 on the previous year. The signs are that this total will be surpassed when figures for 2017 are announced.
Government initiatives, such as Start Up loans and tax breaks for small business owners have played a part and many people who have been made redundant have used the pay-offs to go out on their own.
The excitement for many is having an idea and making it a reality. Entrepreneurship is a growing trend, but there is a flip side – a study by small business experts Ormsby Street found that four in ten small businesses do not survive past five years, with poor cash flow a major problem.
That means it’s vital to take care of every penny that goes in and comes out to ensure your business dream doesn’t become a nightmare.
You may not have gone into business to become a ‘bean counter’ but managing your accounts in an effective and cost-efficient manner are the foundation of business success. Get that wrong and you’re in trouble.
Here are some top tips for managing your business finances.
Keep meticulous records
From day one, it’s important to keep track of income and expenditure by recording every transaction. Remember too that you will probably have incurred costs BEFORE you set up and some of these are tax deductible.
Keep a diary of key dates when payments are due, particularly VAT, PAYE, income tax and your company accounts. Missing any HMRC deadlines will cost you money in fines that a fledgling business can ill afford, so follow their advice to avoid falling foul of the taxman.
It is a good idea to use a company formation agent such as first formations to do all the set-up work for your new business, including VAT and PAYE registrations with HMRC, allowing you to focus on making it a success.
If you run a one-person operation or a small company, the chances are you will manage your finances yourself and this will save you money, as long as you are organised and do it properly. Beware false economies!
Set up a system
When it comes to accounts, start as you mean to go on. Get your accounts system ready to go before your business, not as an afterthought. People still keep manual systems, but technology allows you to run your business finances using simple, user-friendly software packages, such as Free Agent or Quickbooks.
Bear in mind that if you are using an accountant, it will be simpler to use the same system as they do if possible and it could reduce their fees. Some offer their own spreadsheets free of charge. If you do employ staff, the HMRC’s free payroll solution may be of help.
A good accounts software package should more than pay for itself by keeping all your financial affairs in good order – from income and expenditure to taxes.
Get some (free) advice
The best things in life are free and that applies to advice on managing your business finances effectively and efficiently. The Government is a good source, offering a range of services including
Many banks also offer free advice as does Business Link, which was set up specifically to support the UK’s start-ups SMEs.
Budget for tax
Benjamin Franklin, one of the founding fathers of the United States, said that two things were certain in life: Death and taxes.
It’s fair to say that getting the taxes wrong has been the death of many a business, so always remember that the profits you make are not all yours. The HMRC are a ‘business partner’ whether you like it or not!
Always factor in the taxes you are liable to pay as you go along, so you are not caught out. Open a separate account and deposit it there. A general rule of thumb is to set aside between 25 and 30 per cent of your income for the tax bill.
True profit is income minus operating costs AND taxes. Too many businesses forget that last bit and come a cropper as a result.
Claim for everything
Everything you do that incurs a cost as you go about your business can be offset against your tax bill, as long as you have kept ALL the receipts.
There is a long list of costs you can claim for and they include:
Travel: Rail and bus fares and business mileage (you can also claim for cycling to a job!)
Office costs: If you work from home you can claim for things such as heating, light and telephone bills
Stationery and equipment: This includes stamps and courier charges, printer paper and other materials.
Keep business and personal separate
One of the first things on your ‘to do’ list when setting up your new venture is to open a business bank account to keep your private and commercial finances apart.
It also helps keep your tax affairs transparent and easy to keep tabs of. Imagine the administrative nightmare you would face if you ran your business and personal finances from one account.
All banks have business experts to guide you through the process of setting up accounts for sole traders and limited companies.
Get a good tax accountant
You wouldn’t hire a conveyancing solicitor to defend you on a criminal charge, so make sure you get the right accountant for your business. You can do a lot of the accounting work yourself, but even if you do it all, you are likely to need a good one at some stage, if only for their experienced advice.
A good small business accountant can literally be worth their weight in gold when it comes to filing your accounts with the taxman. They have the skills and experience, they know the pitfalls that can hit you in the pocket and they won’t let you miss those all-important HMRC deadlines. Some accountants may specialise in your sector
Personal recommendations from people you trust are a common way to find one. Alternatively, find a reputable accountant who is accredited by one of these bodies:
- The Institute of Chartered Accountants (England and Wales)
- The Institute of Chartered Certified Accountants (Scotland)
- Chartered Institute of Management Accountants (CIMA)
- The Association of Chartered Certified Accountants (ACCA)
Make sure you know what the costs and fees are in advance and do shop around if you’re not sure. Companies have different charging structures, ranging from a ‘pay as you go’ arrangement to fixed and variable fees.
Finally, set up a meeting with your preferred candidate and ask lots of questions before signing on the dotted line. This is an important professional relationship and it pays to get it right first time.
Sole trader or limited company?
It’s much simpler to run your accounts if you are a sole trader. Things are more complex for limited companies and the penalties for getting it wrong are more severe, from HMRC and Companies House.
If you fall into the latter category, you must be absolutely certain that you are able to carry out the required tasks properly, otherwise you could be faced with considerable penalties from HMRC and Companies House.
Keeping accurate and detailed records is essential and your accounts must provide verifiable information about:
- Business income
- Assets and liabilities
- Stock inventory
- Goods bought and sold
These records are essential to compile statutory accounts, company tax returns, VAT returns (if your turnover exceeds the 2017-18 threshold of £85,000) and pay your corporation tax and once they have been approved, don’t shred them or hit the ‘delete’ button – all records must be kept for at least six years.
HMRC works out how much corporation tax your company owes based on this information and you must pay within nine months and a day after the end of your financial year. Doing all this on your own is possible, but time-consuming and complicated, so this is where a good small business accountant would be a wise investment.
No gain, lots of pain
Failure to comply will hit your bottom line, with current penalties ranging from
Between £150-£1,500 from Companies House for late annual accounts, doubling will if they are late for two years in a row.
Up to £5,000 if you are prosecuted for failure to file your accounts.
A range of penalties for late tax returns, from £100 or 10 per cent of any unpaid amounts to a minimum fine of £500 for returns that are late three years in a row.
Ready, steady, go!
Getting the accounting side of your company running smoothly, efficiently and legally increases the odds of it being a success. Get organised, do your research and obtain the right advice and then you can really get down to business. Good luck!