Accounting for start-ups – Small Business UK

Did you know that around 500,000 to 700,000 new businesses are launched annually in the UK, with 77 launching every hour? The start-up world has grown exponentially over recent years, and there are currently over 5.8 million small businesses vying to be successful in their fields. The global start-up economy creates nearly £3tr every year.

Starting a new business is hugely exciting, but any start-up that wants to thrive must get on top of all business functions, including its accounts. According to one recent survey by CB Insights, 29 per cent of start-ups failed because they ran out of cash.

Accounting is how start-ups record, organise and understand their financial information. This will include all financial data – records of all company transactions, taxes, and projections. Both money and time are finite. Remaining on top of accounts allows start-ups to have real-time visibility of their business’s financial health so they can make smarter decisions to maximise profits and identify growth opportunities.

‘According to one recent CB Insights survey, 29% of start-ups failed because they ran out of cash’

With the right knowledge, tools, and advice, you can make your accounting and bookkeeping a seamless part of your business. Entrepreneurs who are launching new companies will have many plates spinning, but accounts are one part of a business that will need to keep rotating at the right pace.

>See also: How to manage your accounts as a small business

Top 6 accounting tips for start-ups

#1 – Use the right software

As any business grows, it will be challenging to remain on top of all financial transactions. Some larger companies will use customised accounting software or enterprise resource planning (ERP). However, the growth of off-the-shelf cloud-based accounting software products offers many start-ups cost-effective, secure, and user-friendly options that can work across all industries.

For example, Xero automates tasks and is very flexible, so you can access your financial accounts whenever you need them. It updates in real-time and has over 800 app integrations. There are also other options, such as FreshBooks, QuickBooks, Sage, ClearBooks and Crunch, along with many others which can be customised to suit your needs. These products promote data accuracy and tax filing.

The Government is also heading towards a situation where all companies, start-ups, sole traders, and self-assessment tax returns must be reported digitally. This is called the Making Tax Digital initiative, which is already in place for business and organisational VAT returns. Investing in this software at the start-up stage will ensure that any new company complies with current and forthcoming legislation around accounts, statutory returns, and finance.

#2 – Have a financial plan

It is pretty hard to know how to get where you want to go without a roadmap, so having a sustainable financial infrastructure embedded into business processes is essential. You will need to detail your business goals and the cash, labour and other resources required to make it happen.

This type of financial planning will allow for sensible cash flow management, smart budget allocation, risk mitigation, and transparency. For example, if you know there will be seasonal fluctuations in sales or overheads, your planning allows you to spend accordingly. There are many costs involved with starting a new business, from professional fees, insurance, premises and staffing to stock and technology costs, and it is essential that these are accounted for.

A good financial plan will ensure that you remain on track, especially as challenges arise. To create a safety net, it is also a sage idea to underestimate profits and overestimate costs. Entrepreneurs should review their financial plans regularly to review goals and targets.

>See also: The importance of financial reporting for small business owners

#3 – Be organised

All UK businesses must keep accurate financial records and retain them for seven years. The entire framework of your business relies on your finances. Reliable accounts allow you to access information and financial data if required, and you can save significant time. Generating quick invoices and quotes can make the difference between winning or losing new business.

With the right organisational structures in place, you will be able to analyse financial data, such as income, expenses, profit margin, sales, purchase, vendor details, and taxes, to track growth. Most companies will experience negative cash flows during the start-up period, so financial organisation during this time is particularly important.

The right software and organisation can reduce errors, allow seamless collaboration with your colleagues, help you generate specific reports and make strategic decisions.

#4 – Use an accountant

As a start-up business owner, you may consider doing your own accounts, but a good accountant experienced with helping numerous companies which have been in your situation will be able to provide cost-effective support help. They will also ensure you avoid common pitfalls.

In the early days, it is often more sensible to outsource most of the “non-core” work to others. For example, do you want or need a full-time accountant on hand five days a week? Probably not. Outsourcing work to a specialist accountancy firm means you will build good accountancy habits and structure from the start, and you can concentrate on other strategic parts of your business.

By using an accountant, you will also receive objective financial consultancy and insights regarding your financial data, avoid expensive fines from HMRC, and feel confident that your financial record-keeping is accurate and organised.

#5 – Make the most of the financial help available

Many newly launched businesses will require some initial funding, and one of the most common reasons that start-ups fail is a lack of capital. Depending on your business’s nature and location, grants or tax incentives may be available to help your business. However, many entrepreneurs do not realise they are eligible or delay the application process. Any accounting firm specialising in start-ups will be able to give you the necessary advice about grants and other information that may be relevant to you.

You may also be eligible for guidance and workshops to help your business grow and succeed. Again, what is available will vary depending on the area.

#6 – Achieve a premium exit valuation

As thrilling as starting up a company is, many entrepreneurs plan on exiting the company at some point. Therefore, selling a start-up needs intricate planning, and it is essential for business owners to have a clear idea of the value of their start-up so they can communicate this to potential buyers.

Companies with proper financial systems in place always have premium value when it comes to an exit. It creates confidence that you have produced a well-run enterprise. Entrepreneurs can prove recurring engagement, robust data and organic growth, which are vital components when it comes to creating a valuation.

James Richardson BA FCA is a director of Metric chartered accountants

Further reading

Best UK small business accounting software – review guide

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