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Accounting for Startups & Small Businesses – 5 Top Tips

Updated: Sep 28, 2020

Roughly 80% of UK companies fail within their first year, and according to the latest figures from the Office for National Statistics, only 42.4% of businesses started in 2013 were still trading five years later in 2018.

Surprisingly, most start-ups don’t fail because they are new, or the idea isn’t good enough. Most fail due to problems surrounding financial management. A recent analysis revealed that 82% of start-ups fail as a result of cash flow problems. Some of these money related problems include running out of cash, lack of proper funding, price/cost issues and poor budgeting, among others. So I’ve put together some tips to set you off on the right foot and help overcome the teething problems of a new business. 

1) First up, get a business bank account.

Keep business transactions separate for clarity and simplicity; this is essential for making sure you have a straightforward source of information when it comes to preparing your accounts and tax returns.

2) PLANNING:

i) Budget – set up a budget detailing planned income and expenditure for the year. In the same way as you would with your own personal income and expenditure. This keeps you accountable, gives you a goal to aim for, and allows you to measure performance. It also helps you to manage costs. Understand your KPIs and how you can measure them.

ii) Forecasting - Regularly review your budget and make any necessary adjustments for changes to the business plan; this allows you to track how well your company is performing and make reliable strategic business decisions accordingly. For example, if a particular product/service consistently performs badly, you may consider discontinuing that product/service and placing your focus elsewhere instead. In this way, good finance plans are essential for keeping you on track.

3) Have a good record keeping system

The better the system, the easier it is to track performance, as well as fulfilling your statutory obligations to HMRC. Do as much as you can paper-free (there are some great software programs out there, such as Xero and Quickbooks, to name a couple) but ensure all details about inflows and outflows are retained. This is imperative for tax purposes.

4) Cash flow, Cash flow, Cash flow!

This is by far the way the most common reason that start-ups fail – they simply run out of money. Good practice includes billing customers as soon as you can after the work has been carried out, making sure they pay promptly, and paying suppliers only when the invoices become due. Also, it sounds simple, but avoid any unnecessary expenditure (those costs all add up quickly!)

Have a cashflow forecast so that you can see your financial position easily and avoid any unwanted surprises. Budget for tax. Automate bill payments wherever possible to avoid any late payment fines or interest payable.

5) Time is money! Hire someone to help.

When you’re starting a business, your focus will naturally be on that. It can be tempting to put off doing accounting work, BUT this can lead to late returns and sometimes hefty fines later down the line. Outsourcing your finance tasks can give you peace of mind that an expert is taking care of the all-important accounting jobs (probably in half the time it would take you to do the same work), keeping you ‘legit’ and stopping you from losing any sleep at night, so that you can focus on what you do best.

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