A Simple Guide to Starting a Business in the UK – Part 2
Starting a Business
5. Income and expenditure – what to track and how
Your company’s financials are the important reports or statements that offer you insights into the health of your business. It’s important to know what these are and how they are generated so that you’re aware of how your business is performing at any given time.
By law, sole traders must maintain accurate financial records every year and you must retain yearly records for six years if you are running a limited company. It’s key to get organised with how you do this. Many business owners start off with a simple process using spreadsheets, while a growing number opt to use accounting software.
You can manage your cash flow on spreadsheets, like the kind you can create in Excel. If you’re not an Excel guru you might be better off considering a Cloud-based electronic software system, like Xero.
Using accounting software to manage your bookkeeping saves time, money and human error. Inexpensive software is available to automate record keeping. For example, it can automatically pull transaction records from your bank account so you don’t have to manually enter each transaction.
A good business reporting solution can take care of all your vital business information and present it in an at-a-glance view to help you make the right decisions. You can customise your reporting depending on your priorities at any given time. You may want a quick daily overview, drilling down to whatever is appropriate that day.
Tracking your income and expenses in real-time is a big time-saver. If you have a Smartphone, there are plenty of free apps available for easily recording income and expenses while on the go. The best apps have features that make keeping up with the details easy, like saving photos of receipts so that you don’t have to keep paper copies.
The three most important aspects of your financial statements are your balance sheet, your income statement and your cash flow statement.
The balance sheet of a business essentially identifies its net worth. This gives a snapshot of your company’s health by indicating how much your company owns (its assets), and how much it owes (its liabilities). Examples of assets are cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable and interest payable.
A business’s performance or results is reflected in the income statement. Use this report to monitor when your business makes a profit or a loss at any time. This statement is generally divided into two parts: the operating and non-operating sections.
The operating items section reflects the revenues and expenses involved with the production, importing and selling. The non-operating items section discloses revenue and expense information about activities that are not tied directly to your company’s regular operations.
Cash flow statement
For small business owners, how you manage your money is especially important because your start-up capital may not be enough to cover the daily expenses of your business, and so you would need to forecast and plan for cash coming in and going out as accurately as possible. Knowing and understanding what your business’s income is and where it comes from allows you to determine what you have in the bank to spend. This helps ensure that you can pay your suppliers and staff on time.
6. Managing business taxes
In addition to managing your incomings and outgoings, you need to make sure you’re on top of your taxes. This can be a daunting prospect, and you may want to seek advice from an accountant to help you navigate this. There are three key areas to be on top of: Self-Assessment, VAT and corporation tax.
Self-Assessment is a system HM Revenue and Customs (HMRC) uses to collect income tax. Once you’ve identified your business structure, you’ll need to register with the HMRC to file your taxes. You should register as soon as possible once you’ve started your business to avoid fines.
Value Added Tax, or VAT, is a tax that’s charged on most goods and services sold by VAT registered UK businesses. Unlike other taxes, VAT is collected on behalf of HMRC by registered businesses. Once you’re registered for VAT, you must charge the applicable tax rate on any products or services you sell.
If your business makes more than £85,000 over a 12-month period, or if you expect to make more than that over the next 30 days, you will need to register for VAT. If you fall below that threshold, it may be beneficial for you to voluntarily register. Being VAT registered may add to your business’s professionalism. Also, if you make a lot of purchases, you may be able to reclaim the value of VAT on these items.
To be compliant with VAT legislation there are two key things to bear in mind:
- You must keep your VAT records for at least six years. You can store them in paper form, electronically or within software. Records must be accurate, complete, and accessible.
- You need to make sure you create official VAT invoices.
The following 13 elements must be included on an invoice for it to comply with VAT regulations:
- Unique invoice number that is a continuation from your last invoice
- Your business name and address
- Your VAT number
- The tax point (or ‘time of supply’) if it is different from the invoice date
- Customers’ names or trading names and addresses
- Description of the goods or services
- Total amount excluding VAT
- Total amount of VAT
- Price per item, excluding VAT
- Quantity of each type of item
- Rate of VAT charged per item. If an item is exempt or zero-rate, make it clear that there is no VAT on that item
- The total of these values separately
Using software that creates invoices is the best way to make sure your invoices are always compliant. It’s important to stay on top of this – HMRC can contact or visit your business to inspect your VAT records for accuracy.
3. Corporation Tax
Corporation Tax applies to:
- Limited companies
- Any foreign company with a UK branch or office
- Clubs, co-operatives or other unincorporated association, (e.g. a community group or sports club)
As an owner of any of these business types, you are responsible for calculating and reporting your Corporation Tax.
You’ll also need to file your company tax return by the end of your accounting period. If you need help with Corporation Tax, you can appoint an accountant or tax adviser to help you.
7. Strategies for growth
You’re on top of your cash flow, financial monitoring and taxes. Here are some ways you can start to grow your business, starting with your existing customers.
- Gather customer feedback. People who have bought from you are often the best judge as to what sells and why. From there, you can work out your most effective sales strategy. By unearthing what your customers need, and when, you can also predict demand. Follow-up each sale with a courtesy call, or send a customer service questionnaire.
- Don’t forget about social media, the platform for opinions. It’s a gold mine for cost-effective ways to gather customer opinions and sound out new products or services with your followers on Twitter and Facebook, plus you can check out competitor activity on social media.
- Exploit cross-selling and up selling opportunities. Reach out to your existing clients by increasing either the range or the value of what you sell. If you sell online, use your website and email marketing campaigns to make recommendations based on customers’ buying habits.
Remember, no customer likes to be overly badgered with sales pitches, particularly if the product or service doesn’t meet their needs. Your marketing and sales campaigns need to be accurately targeted. Otherwise, your customers could lose their trust in you, jeopardising the relationship. Your goal is to build solid, long-term associations, not chase one-off profits.
Although not an exact recipe for success, by following the above you’ll at least be able to keep track of where you are and hopefully you’ll be on the right tracks as you start your business off in style.