Starting a business can be both exciting and daunting, but there are loads of factors that can affect the success or failure of your business. Some of the stats can be quite daunting:
- Fewer than half of UK Start-ups make it beyond 5 years (GOV.UK, 2019)
- 60 % of new businesses will go-under within three years (Telegraph, 2019)
However, don’t be deterred as there are also some very positive stats as well:
- 1 company is formed every minute in the UK (GOV.UK, 2019)
- 89% of UK start-ups survive their first year (ONS, 2019)
However, it’s worth understanding that there are some pitfalls that many new business owners fall into. But with the right advice, knowledge and guidance these can be easily avoided. In this article, we talk about the most common start-up pitfalls and how to avoid them.
1) Choosing the wrong legal structure for your business
Before you start trading you need to consider the right legal structure for your business. This is not a simple decision. Getting advice early on this from an accountant can be crucial in how the first year of your business goes.
The biggest differences with the business structure you may chose (i.e. sole trader vs limited company) are as follows:
- Liability – As a sole trader if the business hits problems or difficulties, creditors can come after you directly and take your personal assets. As a sole trader, you have unlimited liability for business debts, because there isn’t any legal distinction between private and business assets.
A limited company has the benefit of limited liability, as it forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company.
- Tax – Sole traders are taxed differently to limited companies. Limited companies are generally more tax efficient in comparison to sole traders and partnerships. Corporation tax paid by a limited company is lower than the personal tax rate. However, this is dependent on how much you think you will turnover/earn in a year. If you are only turning over a small income at first, then setting up as a sole trader may be more beneficial.
- Allowances & Expenses – There is generally a wider range of allowances & tax-deductible expenses that a limited company can claim against its profits than a sole trader.
- Protecting your company name – Once you’ve registered your limited company name with Companies House, nobody else can use it. Sole traders are not given the same company name protection.
2) You only think about your accounts near the end of your first year or financial year end
Turning up with a box of receipts and a rough spreadsheet to an accountant a couple of days before your due to submit your company accounts or personal tax return is not the way to run your business finances.
There are a few things you should think about well in advance.
- Look for an accountant earlier, rather than later. Not only can they give you great advice up front about how to monitor and keep your books in order, but they can also offer all sorts of added services and advice like company formations, business bank accounts, accounting software and bookkeeping. You may also be able to spread the cost of your accountancy fees across the year in smaller monthly payments, rather than being billed in one amount at your year-end if you take on an accountant early.
- Get your expenses in order – every pound you claim as a business expense can be taken off your company profits or your income. So, make sure you get advice on what you can and can’t claim.
- Collect money owed on overdue invoices – make sure you’ve collected as much money in from invoices before your year end.
- Get your paperwork in order – throughout the year, make sure you have all your records and receipts in order. If you aren’t great at paperwork, then ask your accountant to provide bookkeeping services throughout the year.
3) Not setting up a business bank account & invoicing in your limited company name
If you’re just setting up a new company, don’t use your personal bank account; make sure you set up a business bank account in your limited company name. If you were a sole trader and are switching to be a limited company, you need to ensure you switch to a business bank account using your limited company name and invoice using your limited company name and bank account from day one of operating your new limited company.
4) Not keeping on top of cashflow
From the moment you start to trade, the flow of cash into and out of your company is vitally important to keep your company going. Cashflow is a good indicator of your company’s health, and if you plan in advance, you can make sure that you always have cash to meet any financial obligations. A cash flow forecast, looks at projected expenses and income and can include various ‘what-if’ scenarios.
5) Not tracking turnover
Why should you worry about tracking turnover? There are two main reasons:
- To understand if you need to register for VAT. You need to register for VAT if you hit £85,000 of turnover. Miss the point when you hit this turnover figure and it causes all sorts of problems and potentially additional fees and penalties for your business. This can include HMRC fees and penalties and more in accountancy fees to go back and amend the situation. So, always monitor your turnover. If you think you will hit the VAT registration threshold within the year, then speak to your accountant straight away.
- If you’re a sole trader and your turnover and profits start to grow, you may want to consider how becoming incorporated could lower your tax bill. Speak to an accountant or financial advisor if you’re unsure if it’s the right time for your business financially.
6) Trying to avoid the cost of accountants
Do you understand the difference between a personal tax return and a corporation tax return and whether you need to do both? Do you know the deadline dates you need to meet for HMRC to avoid penalties? Do you know what you need to declare on the different tax returns or what expenses you can claim against your company or your income? You may some of these things, but an accountant can actually help you make tax savings and avoid you incurring HMRC penalties as well as offering great advice about company formation, business bank accounts and tax planning.
7) Failing to factor in all your costs
Many people decide to leave permanent paid roles to launch a business, only to realise they can’t financially sustain the company in those crucial first years. Depending on the type of business, in the UK, it is estimated that most start-ups spend between £1,000 and £10,000 in their first year on costs to get started. It’s crucial that you factor in all the costs associated with your business and have adequate funds to cover them. This may mean raising funding for your business from external sources. It’s something you need to plan for and prepare for.
8) Being wasteful/controlling costs
Often small business owners sign up to all sorts of services, subscriptions, software, training, and resources that they think they need, only to find further down the line they may not need them or what they’ve purchased isn’t working for them.
Really sit back and consider what you can afford as a monthly budget, what you really need right now or costs you currently have and whether those things are necessary or adding value to your business. Always remember that you do need to invest to grow, so don’t cut costs on everything that might then hold back that growth, but truly think about the things you need to spend money to run your business and grow your business.
9) Not outsourcing when you really need it
Understand what you can and should be doing yourself in your business and what you can and should be outsourcing. Outsourcing is one of the best ways to achieve higher efficiency in your business. As a new business owner, you may have the time to do everything yourself, but do you have the expertise?
Also, as your business grows, consider if it’s still the best use of your time to be doing some of those day-to-day tasks. For example: many business owners will outsource their accounting and IT early in their business life cycle, but continue to try and do all their admin, bookkeeping or their marketing themselves.
Outsourcing allows you to bring in expertise and give you back time without the cost of an employee. It will allow you to claim back your own time to do more work that will earn you money or more time to develop your business.
10) Not focusing enough on marketing & business development
If you’re busy and inundated with work, that’s great. But remember it’s easy to be busy and then not put time aside to continue to market and develop your pipeline of future work. Then three months down the line when the initial work has dried up, you’re scratching your head wondering where the next sale is coming from. Putting time aside in your business to market and develop your pipeline of future work or future sales is crucial. Whether it’s networking, being present on social media, or ringing old contacts who may be able to refer you work, putting time and effort in regularly will help your business to grow longer term.
Starting up a business is a huge step to take and realising your dream can take hard work and determination. But remember you don’t have to shoulder the burden alone.
Here at DNS accountants, we’ve helped thousands of new businesses start-up and grow. We’ve helped them overcome the challenges and avoid the pitfalls. Why not let us help you?
Contact us now if you’re about to start a business or have started a business already and need some help and advice.
Also See: 10 ways to avoid business insolvency