Around 50% of start-ups fail within the first five years and top of the list of reasons for this is poor financial management. If you are starting a business, you want a strong financial foundation on which to build it and reduce the chances of your becoming one of the negative 50%. So how do you go about doing this?
Training and help
Unless you are an accountant, then there are two things you should do before starting your business – get some basic training and find someone to give you accounting and tax advice. While this doesn’t have to be an accountant, it might not hurt to build a relationship with one for the time when your tax returns come due.
The training should cover basics such as bookkeeping, monitoring the business finances and payroll as well as stock or inventory issues. You don’t need to be qualified in these areas because there are some great pieces of software to help but you should understand the basics, what information you will be required to provide and how to manage the flow of your business’s cash.
From day one, make sure you start your bookkeeping and other monitoring correctly. This means you don’t have to spend time frantically backtracking to find a receipt or a transaction. It also means you can effectively manage your expenses alongside the incoming funds to make sure the business is staying solvent.
As well as your monthly books, keep a record of your profit margins. This will help you see if the time has come to employ someone else in the business – to make sure there is enough cash coming in to pay their wages.
Business bank account
It is a requirement to have a business bank account even if you are a sole trader so make sure you set this up. Look at deals on accounts that offer a year or two without any fees and consider changing banks after this period to save money on bank fees. Look at the benefits of the account – do they charge for foreign currency? Do they have easy internet access to accounts? Make sure the account ticks all the boxes.
Start saving for tax and VAT
While you may not have to deal with VAT in your first year, you will likely have to pay tax. And rather than have to find a sum of money all at once to pay a tax bill, the best idea is to put some away each month. There are online calculators that tell you how much tax and National Insurance you would have to pay on any amount of money made, so put this figure in a savings account. You even get a little interest on it while it waits for the tax man to collect.
Start-up businesses are full of enthusiasm, excitement and the thrill of being your own boss. But if you fail to lay down solid financial foundations, then you are risking it all in the longer run. Start as you mean to go on and increase your chances of doing just that.