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Early stage accountancy advice for new entrepreneurs and businesses

Early stage accountancy advice for new entrepreneurs and businesses

This article was written by Henry Cooper FMAAT, vice-president of the Association of Accounting Technicians (AAT).

Fifty percent of start-up businesses fail in the first year and 95 percent fail within the first five years but despite the economic downturn, the SME market continues to grow. While no one knows if a business will succeed or fail - you can take steps in order to help your business get off to the absolute best start.

While most entrepreneurs focus on getting their business up and running, many often forget the importance of accountancy and how it sits at the heart of every business proposition. Every entrepreneur wants their business to grow and be profitable, but the problem is that a lot of entrepreneurs forget that in order to be profitable you have to understand your finances and the process of your financial management from day one.

While it's easy to shy away from the basics of accountancy, those that do this do themselves no favours further down the line. The financial management of your business affects everyone from your supplier through to your customers, investors, employees, shareholders and HMRC.

In poor economic climates those businesses that don’t understand the fundamentals of basic accountancy and bookkeeping will sink quickly. As will those that see the professional guidance of an accountant as an unnecessary cost.

Every business regardless of size and turnover needs the professional advice, expertise and support of a professional accountant. Especially when first starting out. When looking for accountancy support, use an accountant that is registered with a professional body and therefore is up to date with their CPD (continued professional development.)

Hire an accountant

Before you set the wheels in motion and part with both yours and your investor’s cash, seek professional support from a professional accountant. Doing so has many advantages:

  • An accountant has years of knowledge and insight and can be a solid advisor to you throughout your business journey
  • An accountant can spot problems with your finances before it’s too late
  • An accountant can offer you advice and act accordingly on important issues such as tax legislation, PAYE, NI benefits, liquidation etc
  • An accountant will keep you up to date with changes to government legislation
  • An accountant can find ways to maximise the potential of your company in order to ensure growth

Build up your accountancy knowledge

Just as much as it’s important to have on hand a professional accountant, it is equally as important for you as the budding entrepreneur to have a good grasp of your financial management and the basic accountancy terminology.

  • How can you succeed if you don't know how much your business is worth? Or you don't know the difference basic terms such as cash flow and profit
  • How can you communicate effectively with not only your accountant but also your investors, suppliers and employees if you don't understand the basics?
  • Gaining accountancy knowledge and know how will allow you to make better and more strategic business decisions
  • Businesses that do their own bookkeeping and do it well can use their accountants for a higher level of expertise
  • You can monitor your competitors by having a firm understanding of their annual reports
Businesses that do their own bookkeeping and do it well can use their accountants for a higher level of expertise

I often think this should be obvious, surprisingly it isn't. Most entrepreneurs either don't invest time to understand the basics or lack interest in this area of the business. However there is little excuse nowadays to turn a blind eye. There is such an array of resources available to the SME market and often these resources are free.

Companies House will provide a key tool for company directors as will the actual HMRC website. These websites are kept up to date on changes to tax legislation and accountancy standards.

Think wisely about your business entity

This will take a lot of thought and again it's worth seeking professional advice and guidance in order to weigh all the options. Also, take note that whatever legal business structure you decide to be, you have to register with HMRC.

It's important to understand the differences between the various business structures with strong emphasis on sole-trader, partnership and Limited Company/ Limited Liability Partnership.

Sole-trader and Partnership

The process of setting up your business under the entity of sole-trader or partnership is relatively straightforward. All you are required to do is register with HMRC. You don't have to publish your accounts publically and you only pay tax on the profits you make.

However the disadvantage is that you have little security and unlimited liability. Therefore if you acquire debts that can't be paid then your creditors are in a position to seize your personal assets.

Limited Company

Registering your business under this title means that you will have a lot more regulations to abide with. Not only do you have to register through Companies House and let HMRC know how many employees you have, you will also have to pay national insurance and income tax. However, the advantages are that you benefit from limited liability. Your personal assets are more protected. Also in more corporate environments this type of structure is seen as more reputable. Legally you are also required to publish a yearly basic financial report which is made available for anyone to purchase.

It's wise to consider:-

  • The pros and cons for each business structure and to think wisely about your business needs now and in the foreseeable future
  • Be aware that depending on what structure your business becomes this will have consequences on what records and accounts you have to keep
  • While you can change your business structure, it's important to be aware that being a sole trader/partnership is taxed differently to those businesses that operate as a limited company and therefore if you change from one business structure to another then you should wait until the end of the tax year

Choose an accounting system that's right for you

It’s important to get the basics right and start as you mean to go on. You need your accounting information to be accurate and therefore it’s worth considering whether your business would benefit from a part-time bookkeeper. There are stiffer penalties in place for erroneous and incorrect record keeping as well as late submissions of returns and accounts.

It’s also important to consider how you manage your financial processes and what accounting system you adopt. Will you apply and use a handwritten ledger? Will you be implementing and investing in accountancy software? Have you considered using cloud computing or will a simple spreadsheet be sufficient for your business needs?

Cloud computing has opened a gateway of possibilities for business of all sizes and sharing your data with your accountant in this way allows your data input to be regularly checked and interrogated. Also by moving your accounting needs online you can take advantage of filing your VAT return and paying your VAT electronically which will allow you to benefit from extended payment deadlines.

Startup businesses would be wise to take advantage of simplified reporting e.g. the VAT flat rate scheme.

A lot of startups invest in accountancy software and before you make this decision, I would highly recommend firstly seeking advice of a professional accountancy advisor. My words of advice on investing in any type of accountancy software are……

Accountancy programmes will only work for you if you’re accurate with the data input.
  • Accountancy programmes will only work for you if you’re accurate with the data input. There is the term 'garbage in, garbage out' and I fear there are many businesses out there that invest in software hoping that the software will do all the hard work. The reality is you need an experienced bookkeeper to use software properly and to its full effect
  • Some accountancy software can be very costly. Some software packages have upgrades on a regular basis, which can mean that users have to pay for the upgrades to retain the support
  • The software functions can be complex and some businesses lack the understanding to use the software effectively
  • If you are inexperienced with bookkeeping you may be better off using a manual spreadsheet based system. While it is more time consuming, often than not it's easier for the lay user to update and understand

The consequences of bad bookkeeping and financial management are huge and can often make or break the success of a business. But by putting good accountancy practices in place along with making your accountant an integral part of your team, then you have the best opportunity to allow your business to grow and flourish.

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20 January 2023 | Marketing
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