Good financial management is the cornerstone of every business – without it, you can’t survive, and with it you thrive. Here we’re dealing with the critical elements of finance and funding, to help you get money when you need it, to manage and control it.
There are lots of places to look, but it’s important to make sure you’ve done your homework first. The fundamentals of planning will help you to make sure you’ve thought through:
- What do I need money for?
- How much do I need – and how much do I want?
- Am I prepared to offer anything in return for that money? Shares in my business? Or do I want to sell goods in advance of making them?
- Do I have any security to offer?
- What are my options if I can’t get that money?
Once you know this, it’ll help you to work out what it is you’re looking for.
Self funding – using your own savings or investments, or asking family or friends to get involved in your business.
Bank financing/debt finance – borrowing from a bank or financial institution, and repaying with interest. Usually this borrowing will need to be secured against something, especially if you’re a young business, and you should take great care before doing anything that risks your home.
Investors – primarily looking to make money themselves, investors can put money into your business in a few different ways depending on what you need, and whether you also want their expertise.
Crowdfunding – becoming more and more popular, crowdfunding is usually done online and is most popular for businesses who have something physical to sell, because it proves that you have customers already buying.
Support from the government – Sometimes, the government gives out money, or lends it at low rates, to help businesses to grow and create more jobs. https://www.gov.uk/business-finance-support-finder
FinanceCamp makes it easier for businesses to consider their options and meet sources of finance. Apply now for the next event on May 24 2017
If you’re self-employed or run a business in the North East, you must pay taxes – exactly what type and how much depend on your business. HM Revenue & Customers (HMRC) is the body which deals with tax. If your business trades internationally, check what taxes in other countries you may have to pay too.
The amount, and the type, of tax you pay depends on the structure you choose for your business. But for starters, as a self-employed person, you must register with HMRC to pay tax and national insurance.
If you’re a limited company then you must register to pay corporation tax, and prepare a return so you know how much to pay.
VAT – Value added tax
VAT is a tax on the supply of goods and services, and is paid to the Government. You only charge VAT if you are registered to do so, which you must do when your turnover reaches £83,000 per year. If you sell digital services abroad, you may also need to register for VAT there.
Import and export taxes
Taxes and duties involved with the moving of goods from one country to another can be complicated, but there is help available. The Department for International Trade in the North East can provide specific advice and support, and the Gov.uk website has a collection of information you can use to calculate payments.
Tax as an employer
Tax and national insurance are amongst the considerations North East businesses must make when they begin to employ staff. You have to register with HMRC two to eight weeks before you employ someone – and that includes employing yourself, if you’re the director of a limited company.
Budgets and financial plans help a business to function and to meet its obligations when it comes to paying suppliers, staff, and fulfilling orders for goods and services.
While specific plans serve different purposes, broadly, financial plans help the people in charge to make sure the business is viable, profitable, and performing well.
Managing start-up finances
Doing a budget for a business that doesn’t exist yet is tough, but it’s vitally important that you understand how much money you have available, and what that money must pay for.
The first financial plan you should do is a cashflow forecast, an estimate of the money you expect your business to bring in and pay out over a period – usually the first year. It reflects your revenue sources (sales or other payments from customers) compared to your expenses (supplier payments, premises and tax payments).
This services two purposes – it helps you make sure you have the resources available to fulfil your aims, and it shows to any third parties that your plans are sustainable.
If you need to apply for loans or finance of any kind, a cashflow forecast will usually be needed.
If this new business is going to be your sole source of income, then you should also do a personal budget, calculating the minimum amount of money you need to live – paying rent/mortgage, council tax, utility bills, transport, food and household goods, and anything else you must pay out.
There are lots of templates available online to help you with both.
Managing established business finances
For a trading business, financial plans are real, live documents which change frequently. How often you update them, and who is responsible for that, depends largely on who is involved in your business and how quickly your financial situation is changing.
It’s important to keep records of your finances – you’ll need to keep these records for HMRC purposes and they’ll help you calculate taxes. But they will also help you to understand how well your business is doing, how profitable you are, and how much of a risk you can take with your money.
The financial statements of a business come in the form of three documents:
1. A balance sheet reports on a company's assets, liabilities, and owners’ equity
2. An income statement, also known as a profit and loss (P&L) report, reports on a company's income, expenses, and profits in a period. It provides information on the operation of the business, including sales and expenses incurred
3. A cash flow statement reports on a company's cash flow activities.
Managing finances for growth
Financial projections are a crucial part of any businesses growth plan; usually you’ll need more money to be able to grow. You can do this by:
- investing previous profits back into your business
- taking out a loan
- selling shares to outside investors
- looking for other sources of finance, including government-backed schemes
Scenario planning can help you produce a range of plans which can be adapted based on the financial circumstances you find yourself in.
This is also the time to make sure your financial controls are fit for the size of business that you aspire to be. Automated systems, specialist software programmes and outsourcing to accountants and bookkeepers can all help keep your growth plans on track.
You should have a plan for how your customers will pay you – in advance of receiving goods and services, at the time/on the day, or in arrears/on credit – after the fact. Choose the right plan for you, based on what the industry expectations are and what your individual business needs.
For example, if you’re providing food to consumers they’d usually expect to pay at the time they’ve eaten, whereas if you run a hotel you might expect your guests to pay in advance, and if you’re providing marketing services to another business they might want an invoice which they have up to 30 days to pay.
Terms and conditions
Be clear with your customers about your terms of business and your payment expectations, by making your terms of business easy to understand and available to the people who need them.
They help to minimise legal disputes and help you comply with the law.
Customers must be invoiced promptly for their work, and invoices must clearly state when payment is expected. If payment is not received in time, customers can be pursued to make them pay; in some cases, this can go as far as a court case.
Be wary of offering lines of credit that put your business at risk.