Starting up a business is a monumental and scary step for anyone to take. Whether it’s identifying and refining the service or product that you’ll be providing to clients, compiling a comprehensive list of specific customer targets, or setting out your ambitious business strategy plans for the future, there are many months – and often years – of hard work involved in getting your vision off the ground.
However, all of this hard work to get a business up and running can easily be undone by making basic financial mistakes from day one. Here, Emily Coltman FCA, chief accountant at cloud accounting software company FreeAgent, runs through some of the most common mistakes that new business owners are likely to make with their money, and how these problems can be easily addressed.
Not keeping records
As obvious as it sounds, you need to remember that cash is the lifeblood of any business – and this is never truer than in the business’s early stages. Therefore, it’s vitally important to keep clear accurate financial records so what’s happening to your cash can be understood.
But when a business is in its infancy, it’s very easy for financial management to take a back-seat to more exciting tasks like finding clients, marketing your brand and refining your product. Don’t fall into this trap!
Keeping records and documents for completing tax returns and filing statutory accounts is a legal requirement, and penalties for failing to do so can be stiff. And, equally importantly, your business will never get off the ground if you don’t have a realistic model of your finances and a way of tracking actual progress against that.
It doesn’t have to be complicated or sophisticated, just something that you get into the habit of keeping up to date.
Not keeping it real
When you’re starting out, it’s essential to be optimistic about your business, especially when all around you are dismissing it as just another of your crazy ideas. If you take naysayers entirely seriously, you’d never get anything started!
But finances are probably an exception to this – be careful not to believe too much of your own hype when it comes to projecting revenue and expenses. Experienced business owners will tell you – with a resigned shrug – that everything takes twice as long, and costs twice as much as you’d like. By all means build your projections as you’d like to see it turn out, just check that a more optimistic view doesn’t lead to disaster.
Equally, it’s tempting to defer paying yourself until some mythical future time, but it will give you a false sense of when the business will break-even. You should budget in your salary to make sure you can personally afford to keep the business itself alive. Plus, you need to eat and pay the bills while your business is growing!
Not knowing the rules
Over time, you’ll find yourself becoming reasonably familiar with much of the legislation in relation to tax and accounting for businesses in the UK. But you’ll probably start out with a very sketchy idea about things like VAT Return deadlines, what costs to include, and when to file accounts.
In the early days, therefore, it’s a good idea to get some professional advice from an accountant to help you navigate the various minefields. Remember though, it’s still ultimately your responsibility to comply with the law, so you should commit to an ongoing investment of time in getting yourself up to speed. With a good accountant by your side, you won’t feel you need to know everything right from the start.
Over- (and under-!) claiming expenses
Work on your fledgling business may be mixed together with your personal life and sometimes your existing employment. So, you’ll need to make sure you don’t inadvertently claim for non-business expenses – such as when you claim for the full cost of a journey when half of it was made for personal reasons.
Check exactly what you are entitled to claim for and, if you’re still in any doubt about your expenses, don’t be afraid to ask an accountant for more advice or look at the information available on HMRC’s website.
However, you should ensure that absolutely all of your legitimate expenses are scrupulously recorded. You’d be surprised at how soon lots of small purchases like paper and software will add up to significantly reduce your future tax bill, at the point at which you’re fortunate enough to be making a profit.
Thinking you should do it all yourself
Staying on top of the numbers is one thing, but fairly soon after you’re bringing revenue in, there are probably better things you can be doing with your time than track every individual receipt. Like many other areas of your growing business, you need to be able to delegate managing the books.
If you’re not the best at dealing with the niggly details, handing over to some qualified help – like a reliable, efficient bookkeeper – is probably a good idea. Just make sure that your business can afford to outsource that work before you start looking!
Emily Coltman, FCA, is chief accountant at FreeAgent
Further reading on financial mistakes
Does your business turn over between £50,000 and £500,000? If so, you are eligible for the new Small Business Grants initiative from SmallBusiness.co.uk. We’re giving away £5,000 every month in a free-to-enter competition. Apply now by clicking here. Good luck!