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Understanding how money works is crucial to starting and running a business. 

Creating a business budget

Your main aim in creating a budget is to understand how much it’s going to cost to get your business set up. Highly dependent on your niche and business plan. Here are some costs worth considering: 

• Premises costs. Renting or purchasing? Consider your utilities, internet access, and other fixed costs 
• Equipment costs. Any specialist equipment you’ll need, such as tools, phones and machinery
• Vehicle costs. Do you need a company vehicle? Factor in the costs of fuel and maintenance
• Staff costs. You also need to think about the costs of hiring and onboarding 
• Advertising and marketing. How much your advertising and marketing will cost? Website design, asset design and hosting costs

Consider how much your personal living costs are in terms of rent and bills etc. Ultimately, you need to balance the cost of starting a business with how much you can invest. If you don’t have sufficient capital, you may need a loan or investment.

Understanding tax and VAT

Owning a small business or operating as a sole trader or partnership means that you have certain tax responsibilities. You have to file accounts and paperwork and pay your tax and National Insurance manually. 

Business tax: it’s worth getting up to speed with the exact details and how they apply to you.

There are some points worth bearing in mind: 

• Registering for Self-Assessment. The process of paying tax on your self-employed earnings starts with letting HMRC know you need to send a return
• Don’t forget National Insurance. You’ll also need to make your National Insurance contribution
• Paying corporation tax. Those who operate either a limited company (Ltd) or a limited liability partnership (LLP) will also have to pay corporation tax, based on their annual profits 

If your business has a taxable turnover above £85,000, you’ll need to register for VAT.

Managing your accounts

Depending on the type of business you’re running and your turnover, you may want to hire an accountant to help with this. You’ll need to keep your own records for income, payments, expenses, and other financial activity. As well as bank statements and invoices, you should also file your receipts. 

Accountants can help you make sure you pay the right amount of tax and meet deadlines, as well as give advice and information. If you’re a sole trader, it’s unlikely that you’ll need to pay an accountant each month – once a year during tax season should suffice. 

You may want to invest in some accounting software which will make it far easier to submit your tax return.

If you run a limited company or limited liability partnership, you’ll have to submit your accounts and file a confirmation statement each year. 

If your company turns over less than £150,000 per year, you can manage your accounts and pay your tax on a cash basis.

Business Banking

Sole traders or partnerships aren’t required to have a separate bank account. But, it can be a good way of keeping your personal and business finances apart. Limited companies are required to have separate bank accounts. 

Some considerations when choosing a business bank account: 

• Whether they provide services for businesses of your size 
• What their fees are like in terms of monthly payments and transaction costs 
• Whether they offer perks for joining, such as insurance or accounting software
• How much it costs per year, and whether the initial period is cheaper 
• What their fees are for foreign currency transactions (if you do business overseas)

Key financial information

Financial statements can give you a measure of your business’ financial health, so it’s worth knowing what they mean. There are three main ones:

Income statement (Profit and Loss statement)

A record of your business’ income and expenditure over a certain period. Shows you how profitable your business is during that time. It’s a useful document to understand, particularly when it comes to applying for business finance or investment.

Cash flow report

Shows how and when money moves through your business and shows the actual cash you have available, it also outlines when regular payments are due, and whether or not your business can make those payments. Planning for this cash flow is essential to keep things running smoothly.

Balance sheet

An overall view of your business’ financial health, outlining assets, what you owe (liabilities) and how much has been invested into it (equity). You can see how valuable your assets are, how your business is being funded, and how much of a risk you are to investors.

Forecasting and analysis

A key part of starting a business. Many decisions will be made based on your predictions of how well your business will perform. You need to create an informed guess based on the available data and research. You’ll then need to analyse how successful your efforts are.

Forecasting

A well-thought-out forecast can help you plan for your business launch and future and help you decide where you should spend your money to develop your company. Helps you to anticipate changes in the market. 

Key points to consider when creating a financial plan for your business: 

• Gather your data. Your market and competitor research will be useful here, as you’ll want to see how similar products/companies perform. Try speaking with vendors and wholesalers. 
• Start with expenses. Keep in mind your fixed and variable costs, plus costs like rent, bills, insurance and advertising, remember things like labour and material costs. 
• Use conservative and aggressive figures. Have a best-case and worst-case scenario when forecasting.
• Describe your sales strategy. How are you going to get people to buy your product or service? Do you have a sales team?

Analysis

You’ll need to also prepare for some analysis. There are numerous ways you can review progress.

You can use your financial reports to compare how accurate your forecasting is. You can accurately measure how well your business is performing against your expectations and goals.  

Of course, there are other ways you can analyse your business aside from just looking at financial reports: 

• Web analytics. If you have a business website, you can get insight into how your customers are interacting with it, conversion rates, total sales, where customers are coming from and where they leave.
• Marketing analytics. Insight into how your marketing activity is performing is essential for making adjustments to your strategy. It gives you the chance to measure how effective your brand and customer assets are, as well as understand the lifetime value of your customers.

Funding your business

One of the main issues faced by those wanting to start a business is how to finance the venture. There are several business funding options available to help you get started.

Savings

You may choose to self-fund your company using money you’ve already saved and you want to maintain full control of your business.

You might be able to borrow money from friends or family. Although your legal responsibilities are often limited in this situation.

Grants

In the UK, there are a number of business grants on offer. These essentially provide free money that can help your business get up and running. Often, these grants are used to support the economy or promote innovation in particular fields. You can check out the UK government website for more information on business grants. It’s not a simple process and can be time-consuming.

Investors

Usually, you’ll give a certain percentage of your business control or equity to the investor in exchange for money. Here are some of the methods of securing investment: 

• Angel investors. Wealthy investors provide money to help a business get started in return for a percentage share of the company. 
• Venture capital. Professional investors are known as venture capitalists. They make their living by investing money in a variety of companies to make a profit. For startups, this type of investing is usually limited to those developing advanced technology.
• Crowdfunding. You raise small amounts of money from a large number of people. Often, you provide a small reward to each investor once your project is off the ground.

Loans

Many banks offer loans specifically to those starting a business. They often work in the same way as personal loans – you borrow a set amount and pay it back, with interest, over a certain period of time, no matter how successful your business is. 

To take some of the risks away, you can instead apply for a government-backed Start Up Loan, which comes with support, guidance, and mentoring as you’re getting your business started.