Avoiding financial stumbles: beginner’s tips on understanding business costs
Starting a new business, whilst exciting, can begin with a headache if you’re not too sure on where to start with the financial side of things. From understanding the financial lingo, to working out your overheads, and choosing an accountant, we’ve broken down some essential start up business costs, and explained what they mean for you.
Start up costs
Your initial start up costs will vary on the type of business you are beginning, and the type of business you wish to be. It may include the following: office space, equipment, technology, car, insurance, fixtures, fittings, stock, materials, marketing and agency fees, uniforms, legal costs, and advertising.
A good practice is to start by writing down everything you think you will need to run your business successfully – from the big costs right down to the smallest costs, even stationary. Your end list will be far longer than the example above and will provide a starting point for your calculations.
Choosing a structure
Choosing the legal structure for your business will determine the legal path your business needs to follow. In the UK, you can apply for the following structures: sole trader, limited company, business partnership, unincorporated association, and social enterprise. Our help centre is a great place to start if you are unsure which to apply for.
As a registered business, your legal responsibilities will consist of: start-up paperwork, taxes, business profit, and personal responsibilities.
Once your legal structure has been chosen you will be able to register with HMRC to begin paying tax on your business. Your chosen business structure will vary the amount of tax you pay, and how you file tax assessments – corporation tax, PAYE, and VAT are all included within these taxes.
When you set up your business, it is important to keep all invoices and receipts for things you have paid for. You may be able to claim certain costs back through your company if they are deemed part of running the business.
An accountant is a vital part of any business – big or small. They will be able to assist you with more than simply paying your taxes correctly, and on time. You will also receive advice on how to grow your business and profit, pricing strategies, and business improvements. Enlisting the help of an accountant is essential to ensure the smooth running of your business.
Perhaps one of the biggest expenses of starting up a business is the cost of office space. Again, this will vary on the type of business you are starting: you may need a large warehouse to house stock, or you may be able to work from home if you’re a one man team.
When finding an office space, location is often key. Choosing to be based in a large city may push the cost up. However, identifying which location suits you the best, i.e. which has the best transport links and facilities for your business, are essential to keep the business running efficiently.
If you are renting an office space you may be required to pay a deposit and a portion of your monthly rent upfront. However, some larger office spaces also offer the opportunity to rent out desks or smaller areas at a reduced cost – called ‘hot-desking’ – which are ideal for start ups, especially if you are unsure how much space you will require, or have a limited budget.
Once you’ve located your office, you’ll need to establish whether there are any other costs associated. For example, you may need to refurbish the space to make it secure or legally compliant. You may also need to factor in costs from heating, water, internet providers, and technology.
After office space, employing people can be considered the next biggest cost. In order to attract employees to your business you may need to offer an attractive package alongside a set salary. When advertising a vacancy, you may need to advertise in the local media, employment websites, or enlist the help of a recruitment agency.
As an employer you will have certain legal responsibilities, these will mainly include: wages, tax, and national insurance contributions. In order to legally employ someone you will need to register as an employer with HMRC.
Understanding the lingo
Getting to know the correct terminology for finances can seem daunting, but once you’ve got to grips with what the terms mean you will be able to place each cost under a term.
These are the costs it takes to operate your business successfully, are paid on an ongoing basis, and are required to ensure your business continues to operate. However, overheads are not related to labor costs, materials, or third party suppliers. An overhead cost may include: office rent, salaries, travel, stationary, or maintenance costs. Essentially, anything that costs to keep your business running is an overhead.
These are defined as costs which have no variation, even when the output of the business does vary. For example, a fixed cost for a business would be its lease on a building – something that has no direct influence on production.
These are costs that vary in conjunction with the productivity of the business. For example, a variable cost for businesses could be through material procurement – something that directly influences the amount of production.
The combination of fixed costs and variable costs are combined into total costs.
As the name suggests, these are costs that you have allocated to future transactions which you expect to go ahead. These may be based on goals you have set, for example, or expect to happen.
The costs your business has paid out. These may vary slightly from your budgeted costs but should, in theory, remain as similar as possible – this depends on whether you have budgeted for unexpected costs, for instance.
Once you understand the needs of your business and follow our guide to understanding business costs, you will be on your way to start up success. For further information on things to consider when starting up, head over to the help centre.
Shaz Nawaz is the Director of AA Accountants, a forward-thinking accountancy firm based in Peterborough, who has often been called upon by national press to discuss matters of finance. He is experienced in both accountancy and advanced taxation practices, and has been instrumental in improving the profits of many businesses.
Published Wednesday January 14, 2015