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Financial considerations for starting a small business

By Colin Lawson, Founder & Partner at Equilibrium

The process of starting a new business is a complex and often stressful experience, and with little knowledge in this area, things can become increasingly difficult.

Important planning, proper planning and finding funding from the right places may seem incredibly daunting, but can be made much easier with the right processes in place.

The financial aspects of starting a business are among the most important factors to consider, and developing your financial plan is one of the first things any entrepreneur should focus on. Here, we take a look at the considerations you need to make, giving you the information required to make sound business decisions from the offset.

  • Structuring your business

It is best to structure your business while considering any tax breaks that you could benefit from. Choosing the correct business structure is one of the biggest decisions an entrepreneur should make when starting up – and the decision you make will have a significant impact on the way you are protected by law and the tax rules you are required to adhere to.

The choice between becoming a sole trader and limited company often divides opinion. Many new small businesses start out as sole traders as a matter of simplicity due to the fact there are no Companies House filing requirements, and profit losses are returned annually to HM Revenue & Customs (HMRC) through a tax return. What’s more, sole traders are not required, officially, to follow traditional accounting practices. However, as the business grows, this approach can be unsustainable. This is usually due to the fact that with growth comes additional liabilities, which a sole trader will be personally accountable for.

A limited company can often be safer, particularly when a business is growing. If it runs into problems, a limited company will only lose what has been invested into the company. As profits rise, this option can also be more tax efficient. It is for this reason that many new businesses eventually make the move to becoming a limited company.

  • Tax authority registration

For new businesses, there are a number of authorities that you need to be registered with, depending on your preferred business structure, and it is essential for this to be carried out as soon as possible to avoid problems. HMRC is the main body you will be dealing with for many of your financial dealings, such as tax, National Insurance contributions and VAT matters. If you struggle to fill out the relevant forms, you should always look for expert advice, while also keeping abreast of the tax calendar to prevent incurring any penalties for missed deadlines.

  • Consider your long-term goals

While it may not be at the forefront of your mind, having a long-term plan in place is essential for anyone starting a business. Whatever your age, it always helps to have an idea of your plans in terms of providing for your children or any younger generations in the future, as well as considering your plans for retirement. Speaking to an expert is recommended at this stage, as planning for the future should never be overlooked, even at the earliest stages of your career.

On top of this, you should have an exit plan in mind, while developing a sound financial strategy. Your financial activities are likely to vary considerably depending on whether you are setting up a long-term business to pass on to future generations, or priming one for a future sale. Your long-term funding requirements need to be considered from the outset – this is essential so that you can assess if you are going to need investment from outside sources.

  •  Managing cash flow

Managing cash flow is essential for small businesses, but is often overlooked by firms that get caught up in the day-to-day running of their organisation. Collecting cash and paying bills and employees’ salaries is one of the most important factors for any business, but continues to cause some of the biggest headaches. With this in mind, it is vital that new businesses take steps to ensure that any potential pitfalls in this area are avoided, and that this aspect of the operation is treated with the attention it deserves.

Overall, small businesses have a number of important financial factors to consider from the outset. The key is dedicating adequate levels of attention to each area from the earliest stage possible in order to prevent any issues further down the line. Seeking expert help regarding each specific area is recommended to ensure no mistakes are made at what is an incredibly important time for your new business.

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