When starting up a business, the overall objective is to make money. In order for the business to be successful, its finances must be tracked stringently to ensure that it will not run into any cash flow problems along the way, and if there are going to be problems, these can be picked up early and easily rectified. Finances affect even the way that your business is created from the beginning, determining what type of company is established.
Sole Trader vs. Limited Company
Sole trader businesses, as the name suggests, are owned a run by one person. This is also referred to as being ‘self-employed’. Rather than paying National Insurance Contributions NIC’s) and income tax on what you earn, it is paid on the profits that your business makes. This is done through completion of a self-assessment tax return.
Whilst tax is generally less if you are a sole trader than an employee of a business, there is not the same amount of security. This is because as a sole trader, your business is not separate from your personal finances; therefore if anything goes wrong financially with the business, your personal finances and belongings will be affected.
If you choose to set up as a limited company however, this will separate your personal finances from your business accounts. test website load As a company owner, you will only be responsible for the amount of shares that you have put into the business, and fulfilling any personal guarantees that you may have made to the company.
As part of the legal and financial obligations that a limited company has, they must register with Companies House. This is the UK registrar of companies. Corporation tax must be paid on any profits the business makes, as well as a self-assessment tax return completed to account for any money that you draw for personal use, i.e. as a salary, from the business.
There is far more paperwork and information needed by the government in order to set up a limited company than as a sole trader. As most people are not familiar with the procedure, which has to be completed flawlessly, they often use the services of a local accountant to aid them in this process.
Cash Flow Forecasts
Once you have decided on which business model to set up as, financing it is the next step. Knowing how much your company has to spend, and the expected return and revenue is key to keeping it afloat and ensuring that you do not run into financial difficulty.
It is imperative for a business, whether it be a new start up or an established firm, to produce regular cash flow forecasts. Every company needs to be aware of its outgoings and income, to ensure that it has enough money to cover any bills, and is generating enough returns to make a profit. Many start-up and small businesses fail due to a lack of cash flow, i.e. their outgoings are outweighing their revenue for the time being. This may be due to the business failing as a concept, or it may simply be that the bills are due before the business has time to receive the revenue e.g. corporation tax being due in April, and a large invoice not being paid to you until May.
Small start-up businesses often rely on money from investors such as bank loans in order to get their project off the ground. Often, banks and other investors will want proof that the business is viable and what profits it expects to receive in the coming year or few years – a cash flow forecast fulfils this role.
Companies often work closely with their accountants to create these documents as they can be confusing to prepare without the correct expertise.
Having a local, reliable accountant is essential for any new business start-up, or indeed established company. A good accountant and the services they provide are invaluable in ensuring that your business accounts are up to date in terms of registration and information for Companies House, as well as tax returns for HMRC. It is ideal to have your accountant local as you will need to visit them in person to discuss documents and services from time to time; it also allows a rapport and trust to build between you, which is important if they are handling your business finances.
If trading and living in the Birmingham, Dudley or West Midlands area, Sandwell Accountancy Services in Cradley Heath is a leading company to work with. This Birmingham-based accountancy firm has friendly staff and welcoming atmosphere. This, teamed with industry expertise, take the stress out of setting up a business and its accounts.