Three vital criteria that any prospective startup should consider before they take their first steps into the world of business.
Before we start, an early heads up: everything you need to know about starting up a new business will not, and simply cannot, revolve around one letter. There are twenty-five others in the alphabet. Unsurprisingly, many key topics fall under the various graphemes: P for payroll, T for taxes, X for xylophone (though the last need only apply to musical equipment stores and xylophone repairmen, of which we imagine there are very few).
However, it is delightfully convenient that three of the first hurdles that must be cleared by any prospective business all begin with B. Convenient because they ought to be addressed in the earliest stages of development; delightful because everybody loves a little alliteration.
The structure of your new venture should be at the forefront of your mind as early as possible, when the germ of your idea is but a twinkle in your eye. In essence, you’re not a business until you’ve registered as such.
Operating as a sole trader is the simplest way to conduct your business, especially if you don’t intend to share ownership of your company. You register with HMRC and keep a record of your transactions throughout the year, to be sent to the relevant authority in due course (we’ll come to that in a moment). The profits are entirely yours – but so is the liability. Should your company owe money, it’s you who is directly responsible, and it’s you who will be expected to pay it back. You are the business, and the business is you.
Partnerships are an extension of this, only – you guessed it – with two or more people sharing the profits and the liability. They are taxed in much the same way as before, but only on their respective share. Going into business with friends or partners may seem all well and dandy, but be sure to set out the guidelines early on via a Partnership Agreement – it could save you an awful amount of hassle in the long run, especially when all parties are considered ‘joint and severally liable’. In plain terms, if one partner cannot pay, the debts can fall on his or her buddies in the boardroom.
Alternatively, you could protect yourself from personal debts by establishing a limited company, wherein said company is its own separate legal entity. If it goes under, for example, you won’t lose your house and car. You are classed as both a shareholder and employee of that company rather than its owner, and have to pay yourself a salary or a dividend if you want access to the profits. Establishing a limited company is altogether more complex than becoming a sole trader, but can, in the right circumstances, be cost-effective in terms of taxation. It is up to you to decide whether the additional paperwork is worth the effort for your business.
Every structure comes with its benefits and drawbacks; it’s simply a case of selecting the model that suits your business best.
For more on business structures, see our information factsheet.
Just how important is bookkeeping? Well, it is the foundation on which your profits are calculated, and is the only way you can determine your cash flow, so we’d say it’s pretty vital.
Keep. Everything. We cannot stress that enough. Every receipt, every invoice, every ticket. File it and record it. Keeping on top of the books is advice that seems almost patronising, but you would be surprised by the number of small business owners who find themselves sifting through swathes of paper and scrolling through emails until their eyes are square.
Establish a system that works for you, be it using the regular spreadsheet software on your laptop, or tailored solutions such as Sage Accounts. Don’t be afraid to spend money on these systems, either; they will save you a small fortune in the long run, enabling you to see exactly where the money is going each month. Only then can you project future earnings and address any problematic issues that may arise with your revenue streams. Untidy house, untidy mind, untidy – and less profitable – business.
As a footnote, logging, ordering and compartmentalising your various papers and proofs of payment makes the accountant’s job that much easier, should you choose to use a professional to take care of your books. It’s quicker, too, saving you money as well as time. Smiles all round!
You might think that you don’t necessarily need a business bank account, and that you can run your operations from the personal equivalent. It’s understandable to feel that way, given the long-term costs of opening an account for that purpose. Why pay for a similar banking service to one you already receive?
To go down this trail of thought, however, is more than a little dangerous. Before you know it, your business costs will be mounting up and flying out of your regular account. Travelling expenses, lunch with a client, all of that shipping and posting. It adds up; and, nestled within the same account used for your groceries, becomes increasingly difficult to isolate. Once you lose track of your business expenses, you start losing the money you made.
All banks offer business banking to the public, and most accounts on the market today are free for the first twelve to eighteen months. That’s no payments at all for depositing or withdrawing money for at least one year in the majority of cases. Even when the banks do start to charge once the introductory period expires, the differentiation between the two types of account will help to recoup those payments by eradicating those costly administrative errors.
Of course, it also adds a degree of credibility to your startup. Opening an account in the name of your business looks far more professional than getting your clients to pay their fees directly to the individual – especially if that individual is operating under the name of his or her business.
As Michael Corleone once said, it’s business, not personal. He wasn’t poring over expenditure with the crime family accountant at the time, but it rings true nevertheless.
Today’s article was brought to you by Brian Straughan & Co. and the letter ‘B’.