Starting a business in the UK can be both fun and difficult. Setting up a solid financial foundation is one of the most important yet least attended to part of building a successful enterprise. Good financial management not only helps your business to stay on the right side of legal requirements but also facilitates your business long term success. No matter if you’re starting a tech startup or a local service business, you should be setting up your finances correctly from the get go.
Below is a step by step guide to help UK entrepreneurs manage their business finances and avoid common pitfalls.
1. Select the Right Business Structure
The first financial decision every entrepreneur has to make is to select the appropriate business structure. In the UK, your options typically include:
Sole Trader: Fewer reporting requirements, easy to set up. You bear personal responsibility for business debts as a sole proprietor.
Limited Company: It’s an offering of liability protection, but with stricter reporting and tax obligations.
Partnerships: Good for businesses with two or more partners who share responsibility.
The tax implications and the legal responsibilities of each structure are different, so you’ll want to find a professional to help you decide — such as a self-employed accountant — what makes the most sense for your business needs.
2. Register Your Business for Taxes
Depending on the structure you choose to go with you will be required to register with HMRC. If you’re a limited company you’ll have to register for Corporation Tax and file annual returns, and if you’re a sole trader you’ll have to file a Self Assessment.
If your turnover exceeds £90,000 then you are required to register for VAT. But even if you don’t hit that limit, voluntary VAT registration can also be beneficial sometimes based on your customer base and industry.
With the help of a self employed accountant you can make sure you are aware of these tax obligations and taking advantage of any tax reliefs and allowances available.
3. Start A New, Separate Business Bank Account
A mistake that’s very commonly made is mixing personal and business finances, which can lead to some accounting headaches as well as tax complications. A distinct business bank account must be opened for:
- Clearly keeping a record of your finances
- Accurate tax calculations
- Professional dealing with clients and suppliers
Sole traders are not legally obliged to maintain a separate account but are strongly advised to do so. However, by law limited companies have to have a dedicated business account.
4. Build a Strong Relied Bookkeeping System
Keeping a good record is important for monitoring your cash flow, keeping expenses down and doing your tax records. Digital accounting tools like Xero, QuickBooks or FreeAgent make for easy accounts processes.
Key financial records to maintain include:
- Invoices and receipts
- Bank statements
- Payroll records
- Tax filings
If you’re self employed, there’s also the option to work with a self employed accountant who will make your bookkeeping as easy as possible, keeping your records accurate and up to date so you can concentrate on growing your business.
5. Budget for Taxes and Expenses
Too many new business owners underestimate their tax liabilities. A rule of thumb is to set aside at least 20 – 30 % of your earnings for Income Tax and National Insurance Contributions (NICs) and VAT if applicable.
Don’t forget to account for business expenses such as:
- Office space rent and utilities
- Expenses for services of professional (legal, accounting)
- Advertising costs
- Equipment and supplies
Having a budget gives you a notion of where your money is going and helps you stay on top of cash flow and ready for financial obligations.
6. Comply with Legal and Compliance Obligations
Failure to stay compliant with UK financial regulations will result in penalties. This may vary by industry, for instance if you need licenses, health and safety laws or if you hire staff you will need to follow employment laws.
Maintaining accurate financial records, frequent filing of accurate tax returns, and accurate payroll compliance is all your legal responsibility.
7. Monitor Your Cash Flow
Any business’ lifeblood is cash flow. Nonetheless, even profitable companies can have problems if they don’t have enough cash to pay their day-to-day bills.
To maintain healthy cash flow:
- Make the terms clear for payment and make sure you send your clients invoices on time.
- Follow up on overdue payments
- Regularly keep track of income and expense
- If you are in seasonally affected business, plan for seasonal fluctuations
8. Plan for Growth
Once you’ve set your financial foundation in motion, then it’s time to scale your business. Brainstorm a growth strategy, whatever that means for you—whether that’s expanding product or service offerings, hiring new team members, updating marketing, or more.
Financial management gets tougher as your business grows. A self employed accountant ensures your business goals are reflected financially with regular consultations giving you time to analyse where your strategy is lacking or can be optimised.
Final Thoughts
Getting your business finances set up right from the begining is essential for long term business. This is your business journey, each step is crucial: from choosing the right business structure, monitoring the cash flow, and ensuring tax obligations compliance.
Working with a self employed accountant helps make these processes easier and you can enjoy the benefit of their expertise to help you make sound financial decisions. Building your solid financial foundation will put your UK business in good stead for growth and success.
