With the best idea in the world, the most eye catching brand name, memorable logo and professional looking website, your business will fall flat if you fail to properly plan your finances.
Getting this right is absolutely crucial in the success of your business.
There are two main elements to finances within any organisation - on the one hand you have management accounting, which will be the most important to you in the first instance, and the other is financial accounting, which you will need to prepare for as it concerns the practical side of your company’s finances.
Planning your finances
Management accounting is crucial even before the first day you start your business, and you will have elements of this already included in your business plan.
Loosely, management accounts covers projected finances, so this includes financial planning, financial control and budgeting and forecasting.
In the first instance you need to plan. As you will have outlined in your business plan, you need to establish what both the start up and ongoing costs of your business will be.
This will include all manner of things, including (but not limited to) stock, rent, website and ongoing technical support, wages. This is essentially budgeting.
You then need to work out what you think your sales will be, which is called forecasting. From that you will be able to work out what your profit (or loss) will be and whether you need to invest more capital or take out a loan, for example.
This is an ongoing task and not just something you need to do at the outset of your business.
Though you may, for example, project 6 months or longer within your business plan, it is essential that you keep on top of this in order to control your outgoings and incomings.
It is likely that you will incorporate management accounts as part of your role at least once a month.
It is also likely, and indeed advisable, to enlist external help for your accounts, not least for your financial accounts.
You will be legally required to have your annual accounts ‘signed off’ by a qualified accountant, so it is well worth establishing a working relationship with one early on.
Financial accounts works in the opposite way to management accounts in that it is, to put it at its simplest, tracking actual outgoings and incomings.
How much of this you do yourself and how much you outsource to an accountant will depend on your resources and knowledge, though it is worth familiarising yourself with some elements and doing at least some of it in-house.
For this you may want to set up manual spreadsheets, or even invest in some accounting software.
Sage is a good example of such software, and is easy to use.
Dependent on the budget of your business you may also want to consider hiring an accounts assistant to work directly for you on the basic ledger functions.
Ledger equates to record, and so you will need processes for raising, sending and tracking invoices, as well as a system to receive and pay invoices (sales and purchase ledger respectively), as well as managing cashflow, bank accounts, transfers and reconciling all of these transactions and balances.
If much of this sounds alien, then enlist an accountant sooner rather than later, as they will be able to give you advice on this and also management accounts.
How do I find a reputable accountant?
All accountants need to be qualified in order to sign off your yearly accounts, and so for this you need a Chartered Accountant.
They will be qualified in ACA, ACCA or, occasionally CIMA. The first two are qualifications in financial accounting, and the latter management accounting.
Chartered Accountants deal primarily with financial accounting, although may advise with your management accounts too. Certainly they will know all aspects of it.
For a cheaper alternative, you may wish to hire a non-qualified accountant (sometimes called a Bookkeeper) throughout the year and to only go through a qualified accountant at the end of your tax year.
It is worth considering though that a qualified accountant will also help with your tax returns, and advice on how you might be able to save money.
As with all things it’s possible to find accountants through a Google search, though it is well worth asking around for personal recommendations.
Either way, do ask for customer testimonials when hiring either a bookkeeper or qualified accountant.
Once you have established what your projected finances will be, and have put the processes in place to manage these, you now need to consider how you will manage customers and suppliers.
Good credit management is essential for good cash flow.
Firstly, consider vetting all potential customers to ascertain their proposed risk to your business.
Next you need to decide what your payment terms are. Following this, you need to be prepared to follow up and chase outstanding monies owed.
All businesses, new and old, have this process, so make sure that you are comfortable with doing this.