Ed Molyneux, CEO and founder of FreeAgent, who provide award-winning online accounting systems for freelancers and small businesses, explains some of the most common mistakes that first-time entrepreneurs are likely to make with their money, and how these problems can be easily addressed.
Starting up a business is a monumental and scary step for any would-be entrepreneur to take. Whether it’s identifying and refining the service 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, while first-time entrepreneurs leave no stone unturned when it comes to planning their business, this work can easily be undone if they make basic failings from day one with their finances.
Not keeping records
As obvious as it sounds, you need to remember that cash is the lifeblood of any business. This is never more true than in the business’s early stages. So it’s vitally important for any business to keep clear accurate financial records so what’s happening to the cash can be understood.
But in the early days there are a million and one more interesting and exciting things to take care of as well. So it’s very easy for the finances to take a back-seat.
Of course 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.
But equally important is the fact that 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
Optimism is one of the defining hallmarks of an entrepreneur. 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 entrepreneurs 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 pessimistic 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.
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 and when to file accounts.
So especially in the early days, you’d be wise 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
Especially when you’re getting started, work on your fledgling business may be mixed together with your personal life and sometimes your existing employment. 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.
On the other side of the coin though, you should make darned sure absolutely all of your legitimate expenses are scrupulously recorded. You’d be surprised at how soon lots of small purchases like paper and staples 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.
And in truth, typical entrepreneurs aren’t always the best at dealing with the niggly details, so handing over to some qualified help is probably a good idea. A reliable, efficient bookkeeper can be worth their weight in gold...