When writing a financial business plan, it’s the questions around income and sales that are, understandably, the most exciting.
How can I pay myself? How much will I potentially make?
This is what drives a good idea, the belief that it is profitable.
As the founder and principal accountant at Moore Accountancy, based in South Manchester, Sudipta ‘Sid’ Moore has worked with entrepreneurs at every stage of their startup journey to drive growth.
However, she says it’s important to be realistic, and that these traditional milestones that entrepreneurs dream of will only be realised if the hard work of realistic forecasting and budgeting is done first.
To help, we talked to Moore about the key stages of financing for both nascent and established startups, including finding an accountant, cash flow and forecasting, and raising investment, in order to achieve long term and sustainable success that is even more fulfilling than your first pay cheque.
First things first, when should an entrepreneur hire an accountant?
Hiring an accountant in the beginning stages can be beneficial because you get advice on the best business structure to set up (such as limited liability or sole trader) and best practices for keeping record.
Trust me, it’s often too late if you wait until after the first year of trading has passed.
What business figures should small businesses track to know if the business is doing well?
As the saying goes, ‘turnover is vanity, profit is sanity, but cash is king for your business’.
That means while sales are important for growing your business, knowing your profit margin is even more critical.
Since products and services vary with each business, there is also all kinds of advice here that may not be applicable for every business.
However, your profit margin is what will determine how much you will owe in taxes.
Many entrepreneurs must raise funds before they can put their business plan into practice. How should they finance it?
I suggest looking into a business loan if you want to retain control of your business and you’ve done a forecast that shows you will be able to promptly repay.
Funding with a business loan is more predictable. For example, a high-street bank is mostly interested in your ability to build enough revenue to repay the loan according to its terms.
The bank may also ask you to put up personal assets such as your home as collateral.
In order to attract that active investor, what must a startup demonstrate in terms of its finances?
To attract an investor, typically a business needs to be established in that there is evidence of profit and income.
Startups in the very early stages might not yet be at this stage. You need to be able to show a comprehensive business forecast, considering:
- Variables within the market. These are the demographic, geographic, psychographic and behavioral factors that impact how and why your potential customers shop the way they do.
- Your history of entrepreneurship. If you have experience with starting a business, it may be helpful to highlight it.
- A healthy stream of income. Investors want to know that their cash is just to get things started and your business is capable of generating revenue on its own.
- Accounts showing a profit. You’ll need to be able to show the business can collect on accounts in a timely way to keep cash flowing throughout the business.
When can small business owners expect to pay themselves a salary?
I personally didn’t take a salary from my business for the first year, but I’ve worked with clients who have been able to take a salary from day one.
See what your forecast shows and be realistic. Be aware that you may be living off your savings for a while.
What about entrepreneurs with a side hustle (supplementary income to their primary job), at what point is it viable that it becomes their sole source of income?
I recommend going through the exercise of working out your actual hourly rate based on the time you spend working.
If that amount isn’t enough to support your lifestyle goals, your side hustle isn’t a viable income.
HMRC treats hobbies differently than trading businesses, so it’s important to work out how much you would make if your business were a sole source of income to understand if it should be.
When should an entrepreneur consider employing staff?
When you don’t have the capacity—or more importantly the expertise—to handle something yourself.
With a professional at the helm, you won’t have to worry about the risks of tax penalties, cash shortages, making payroll, and missing deadlines.
How can entrepreneurs get better at managing finances?
The best place to start for me is going to your accountant with your questions.
Next, many accounting firms and business networking organisations offer free webinars on best practices for managing business finances.
There are also books you can read and courses you can take to understand general accounting practices, but only your accountant will be able to teach using your business as a real-life classroom.
What has managing your own accountancy firm taught you about managing small business finances?
That’s a critical factor in keeping cash flow coming in to pay the business’ expenses, so we can’t allow any slack in receiving payments.
How to boss your small business finances
Starting a business? Getting your finances under control from day one is key. Ever wish you could get advice from someone who really knows their stuff? Well now you can.