So here’s the situation – you’re a young aspiring entrepreneur and you’re looking to start your own business. It’s not surprising, as 2 out of 3 people worldwide think entrepreneurship is a good career choice. You have a great idea and you want to share it with the world. So you go to Companies House and register your business.
Everything seems to be going great at first, your product is selling and you’re getting great feedback. But you start to notice you’re having cash flow issues. You start to pay yourself less and you can’t afford to hold stock. Eventually they get too much and within the year you have to shut up shop.
This is a common problem with quite a common issue… keeping track of finances. Those who are veterans know how important this is, but for creative millennials this isn’t as high a priority and often gets overlooked. It’s deadly to many startup businesses. After all, a staggering 50% of all UK startups fail within their first 5 years.
In this guide we look at how you can easily keep track of your finances, as well as make them slightly better. So, what should you do?
Open a Business Bank Account
Even if you’re flying solo on this mission to start with, it’s essential to open up a separate business bank account for finances. Many solopreneurs and freelancers will use their personal bank account; but this makes keeping track of business transactions harder.
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Keeping all business related finances in one account makes it easier when you need to look through it or need to save tax. It’s also much more professional when you give out card details to customers. Did you know that cash held by SMEs in current and deposit accounts totalled £174.7bn at the end of 2016?
It’s important to bear in mind that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. However, even if you’re not legally required to have one it’s still best to have one.
Make sure to shop around for a business account, as they naturally come with higher fees than those with personal accounts. Pick one that suits you and your business and don’t worry about how long it takes, as it’s an important step. Here are the UK’s 10 best business bank accounts according to Money.co.uk.
Track Business Expenses
It may seem like an obvious thing to say, but many business forget to track every expense. This results in wrong figures and dodgy numbers. Even if you’re just buying milk from down the road for staff coffee, you need to get an itemised receipt and keep it somewhere safe.
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Keeping track of these expenses helps when it comes to reporting and tax returns etc. Even if you’re not legally obliged to, it’s still a good habit to get into. You can keep physical receipts in a folder or you can upload them to cloud storage. There are also services you can use to keep track of them.
There are many types of receipts to keep track of. Most common of all are: meals/entertainment, business travel, vehicle expenses, gifts for customers and home office receipts. Make sure to keep all of these on file, no matter how big or small the sum.
Don’t get carried away however, as some people can take business expenses too far. HMRC recently revealed a couple of ‘bonkers’ expenses people tried to claim for such as pet food for a small guard dog and Armani jeans as ‘protective clothing’ for a decorator. Don’t be one of these people!
Bookkeeping, in short, is the day-to-day process of recording transactions. Categorising them and reconciling bank statements. It’s important to do this to stay on top of all of your business finances. Without this, you won’t know if you’re in profit or even if there’s a cash flow issue.
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There are many ways in which you can do your bookkeeping. You can do it yourself in an Excel spreadsheet. You could hire a bookkeeper or account to do your bookkeeping for you. Or, you can use an online tool such as QuickBooks to do your bookkeeping online.
We recommend using an online tool or, if you can afford it, an accountant. You can do it yourself if you feel confident enough, however with less or little knowledge you’re far more likely to get things wrong. This is the last thing you want when money is tight or scarce.
Be Sure to Set Up Payroll
Although you’ll probably start your business as a one man band, you’re likely to want and need help sooner rather than later. The second you start employing people you need to set up a payroll system, or PAYE (Pay As You Earn). The number of Value Added Tax (VAT) and/or Pay-As-You-Earn (PAYE) businesses in the UK was 2.67 million in March 2017, according to ONS.
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Having this system in place not only means being able to keep a better eye on business finances, but also means more security for your employees as they are put on a payment schedule. It’s also a great way to make sure National Insurance and tax is being paid correctly.
Keep An Eye on Taxes
This is where many businesses fail, as tax affects almost every element of your business. Everything from VAT (Value Added Tax) on goods/services to Corporation Tax and Stamp Duty. Because it affects so much, it’s critical that you keep track of it.
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The most common types of tax you face as a business are: Corporation Tax, Value Added Tax, National Insurance, Pay As You Earn, Stamp Duty Land Tax, Capital Gains Tax and Inheritance Tax. Make sure you know exactly which ones affect your business by learning more about them with BusinessZone.
If you’re a business that deals with customers worldwide you may also have to keep your eye on Import Tax. Although many of the above don’t overly affect micro businesses, it’s still good to keep an eye on as you start to grow your business.
Know How You’re Getting Paid
When we say how you get paid, we mean by your customers. Knowing what services you are going to use for product/service payments make a huge difference to your finances, as some services may charge fees.
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You can be paid by cash, third party payment gateway, BACS (standard bank transfer) or via online methods such as PayPal. It’s entirely up to you which method or methods you use, just make sure at the very least you accept cash and/or BACS.
Knowing which services/methods you use means you can better keep track of the money you make. The more services you use, the more time it will take to gather payment data – so try to keep it as simple as you can whilst still offering enough variety for the customer.
Factor Your Invoices
Many businesses that use invoices for payments find it difficult to stay on top of them. Chasing payments from customers can take up a lot of time and effort and many customers may leave you with unpaid invoices. Luckily, there is a solution for you which goes by the name of invoice factoring.
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Here at CCC Finance we will buy your unpaid invoices off of you, unlocking up to 85% of the invoice, for a small fee. This means you get your invoices paid on time – better still we’ll take over the collection of the invoices, chasing payments on your behalf. As long as they’re at least £5,000, we can factor them for you.
This is a great way of keeping your business afloat by improving your cash flow. You can use the funds to pay employees, pay tax or buy stock – using the money to grow rather than waiting for money that may never come.
So there you have it, the various ways in which you can easily keep track of your business finances. Do you do all of these? Is there anything we missed out? Let us know via Twitter at @CCC_Finance!
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