Financial information for beginners in business
When you come up with that amazing business idea, it can be really easy to get carried away and dive headfirst into all the fun parts of getting your business off the ground. However, if you don’t start your venture on sound financial footing, it could threaten its continued smooth running.
That is why this week, we felt the time was right to give you a rundown of the essentials that you need to complete to make your business a legal entity in the UK. We will also give a few other recommendations* to make sure that your business makes the best start to its trading life.
This isn’t a fix – honest! You can operate as a Sole Trader, but many companies opt for Limited Company status for its various benefits that suit the nature of their entrepreneurial pursuits.
With that in mind, the first step any company should take to begin trading legally is to register their business’ details with Companies House. While you could go through the rigmarole of doing all this yourself, we can do this much more efficiently on your behalf. We will even set up a business bank account for you, should you want one, so that you don’t have to worry about that either!
Once you are registered with Companies House, the next thing you may need to do is register for VAT. Not everyone needs to be registered for VAT. In a nutshell, This tax is charged on most business-to-business or business-to-consumer transactions. In general, companies ‘offset’ the VAT they pay on their own purchases against the VAT they receive on their own sales from customers. Therefore if your VAT on sales exceeds the VAT you paid to suppliers or on other expenses, the difference is payable to HMRC. If VAT payable exceeds VAT receipts, then HMRC will refund the difference or keep on your account to use for future VAT returns.
Typically, returns are submitted online quarterly, with most accounting software providing the relevant information at the click of a button, so there is no need to be scared by the process! To make things easier, keep copies of all your VAT receipts and expenses in order from the get-go – there is nothing worse than searching desperately for a receipt for something silly at a later date! For more information on VAT, visit the HMRC website. Idea protection
If the whole success of your business relies on an invention or idea, then you may want to consider protecting this intellectual property so that you can keep exclusivity as one of your unique selling points. This can be achieved in a number of ways, dependent on what it is you are offering:
A copyright protects a range of mediums from artwork to pictures, to TV programmes and music.·
A trademark protects a symbol, design or expression that identifies a product or service.
A patent protects a solution to a technical problem – this may be a process or a product.The above forms of protection vary in cost and time taken to secure, but can be invaluable in safeguarding your company’s long term success. This handy link will help you learn a little more about intellectual property.
Always remember that cash is king! Never mind your profitability, the strength of your balance sheet or how amazing your idea is – if you have no cash to maintain the business, you have no business.
The main difficulty businesses encounter is a lack of understanding of how to manage cash flow and obtaining funding to manage cash. New businesses may struggle to obtain bank loans but a solid business plan (see below) will help this dramatically. Alternatively, funding can come in the form of outside investment (at the cost of reducing your equity share); credit cards; negotiating preferable payment terms with suppliers and so on.
The main focus is to completely understand your future liabilities – ensuring you have enough cash in the bank to pay the next quarterly VAT bill or your Corporation Tax, through to paying employees, your rent or your suppliers.
A business plan is critical for any newly formed company, not only to secure funding if required but also to fully understand what you offer and how you go about delivering it. The level of detail and the exact aspects will differ from business to business, but this will generally involve financial projections (Profit and Loss, Cash Flow and Balance Sheet); an overview of the product/service offered, the target market, staffing and so on. Barclays supply a fantastic guide to creating the perfect business plan.
It may sound dull, but the earlier you bite the bullet and organise your bookkeeping or invest in accounting software, the better it will be in the long term. This will range from managing VAT returns to tax returns, from invoicing clients to exporting data at year-end for your accountants. Various accounting software packages are available to suit a variety of clients such as Sage, Quickbooks or Xero.
Recruiting and paying staff involves an understanding of a variety of employment laws and requires the use of up-to-date employment contracts. Employers must understand what rights they can and cannot offer such as Discrimination, the right to work in the UK and Equal Opportunities. Payroll can be complex, however Payroll software can make life a lot easier in calculating deductions, creating wageslips and advising what tax the employer is required to pay through to automatically submitting tax returns to HMRC. Again, for a more in-depth look at this, HMRC come up trumps.
*These are only some of the things to consider and it’s up to you to understand how they apply to you (sorry but we can’t be held liable for that). If there are other elements to consider or you think it’s worth us investigating and writing about, let us know by commenting below.