Entrepreneurs who are setting up a company for the first time have to get used to spinning many plates, including learning how to manage both business and personal finances. Running a startup involves a whole range of different costs, and it can be a shock to the system for a new business owner who was previously accustomed to receiving a regular monthly paycheck. Here are 7 tips for managing money in the early days of a new business.
1. Financial planning
Whether or not you create a fully-fledged business plan, it’s crucial to have at least a rough idea of expected income and expenses. Some businesses start off with significant funding which will give them ample time to build up a client base or prepare for trading before they start making money.
Other startups will have virtually no funds to last them beyond the first couple of months and require sufficient work from day one to break even.
Either way, it’s vital to formulate a financial plan for at least the first few months of trading, to understand the level of profits that need to be realised to survive as a business. It’s a good idea to underestimate expected profits and overestimate expenses, to create a safety net.
Targets should also be set at regular intervals, to enable financial success to be evaluated.
2. Personal vs business spending
Many new business owners who previously worked for a regular wage will struggle to separate out the income received by their business for: (i) their own personal use and (ii) for dealing with business expenses. This is especially the case for sole traders, but the difficulty of delineating personal and business funds also applies to company owners.
Often the most self-disciplined method of dealing with this dilemma is to decide on a monthly salary and pay this into a separate personal bank account.
The remaining income received can then be ploughed back into the business or paid out later as dividends. This is the common sense approach for limited companies which also have tax benefits if they retain profits within the business rather than paying directors.
3. Detailed expenses
One of the biggest problems when it comes to managing money in a startup is failure to take account of all the different expenses, including those which can arise unexpectedly.
It is therefore important to make a detailed list of all the potential expenses, including:
Even if it’s just a sole business owner, the biggest business expense will normally be the payment of salaries.
A freelance provider of services will often use the vast majority of any business income for their own personal expenses such as mortgage/rent payment, utility bills, food, entertainment, etc.
All businesses are required to pay a portion of their profits in tax. Companies need to pay corporation tax, whereas sole traders only need to pay income tax. It’s worth checking out the latest rates of both income tax and corporation tax.
Depending on the nature of the business, there may also be other taxes to pay.
Retail and hospitality businesses can have significant costs for the rental of premises and utilities.
At the other end of the spectrum, freelance service providers may be able to avoid such costs by working from home or in coffee bars.
Stock and suppliers
Certain sectors will need to employ a large degree of financial management, purely in respect of balancing expenditure on new stock versus expected sales.
But even businesses that do not require stock will often have to deal with suppliers or external contractors, and this can form a major expense.
Business services and insurance
Many startups will need to factor in legal and accountancy fees, as well as a range of other professional services.
There are also various forms of business insurance that need to be considered – some of which are mandatory.
Marketing and IT
Getting a business off the ground will generally require some degree of investment in marketing. Although some of this can be done for free using social media channels, an effective campaign will likely require some help from marketing professionals.
There are also a whole array of IT expenses that need to be taken into account, including building a company website.
4. Contingency measures
Even if profits are healthy, it’s important to carry out regular disaster planning to test how resilient the business would be if it loses a major client or is forced to temporarily close as a result of staff sickness.
Preparing for potential risks by building in contingency measures can be crucial in the long run. Such measures can include savings, access to a business loan, temporary reduction of personal expenses (such as moving in with a relative), or bringing in a business partner with access to significant assets who could help out if required.
Try and keep a good credit score at all times to ensure that a loan is available if needed.
5. Staying on top of billing
In order to maintain a steady cash flow, a keen eye should always be paid to invoicing and payments.
Some time should be set aside each month to check that invoices have been sent out in respect of work completed and that relevant monies have been received into bank accounts.
6. Prepare for tax bills
New businesses often make the mistake of failing to set aside a pot of money for the payment of tax liabilities. This can be a particular danger towards the end of January, which is the deadline for Self Assessment.
If annual profits have risen significantly, the tax bill can be unexpectedly high and will not be covered by previous payments on account.
It’s a good idea to regularly review business expenditure – particularly on services that incur annual payments such as insurance policies, utility bills, and phone contracts.
There are often savings that can be made by switching providers or negotiating new terms.
And, there you have it…
So, we’ve covered 7 tips on managing money when starting up a business. I am sure you will agree staying on top of the finances of a new business can be challenging – especially for an inexperienced owner. If you are concerned about your money management, we would recommend you take professional advice from an accountant.
If you have any questions, please ask in the comment section below and our team will get straight back to you.