Starting a new business is an exciting adventure, but it comes with its fair share of challenges – particularly when it comes to managing finances. For new founders, understanding the fundamentals of financial setup and management is crucial. Done correctly, it can be the bedrock of long-term success; done poorly, it can cause unnecessary stress and potential failure.
In this guide, we’ll break down the key financial considerations every new founder should prioritise, from choosing the right structure for your business to managing cash flow effectively.
Setting Up Your Business: The Foundations Matter
One of the first decisions you’ll face as a new founder is deciding on the right structure for your business. Should you operate as a sole trader, set up a limited company, or consider other structures like partnerships? Here’s a quick breakdown:
- Sole Trader:
A sole trader setup is straightforward with minimal administrative requirements. You’ll report income and expenses via a self-assessment tax return. However, the drawback is unlimited liability—meaning your personal assets could be at risk if things go wrong. - Limited Company:
A limited company provides liability protection, meaning your personal finances are shielded from business debts. It’s a must if you plan to employ people or raise investment, but it does involve more administration, such as filing annual accounts with Companies House and submitting corporation tax returns.
For many start-ups, particularly those with growth ambitions or employees, forming a limited company is the best route. If you’re partnering with others, ensure clear agreements are in place about ownership and responsibilities to avoid disputes later.
Equity and Shareholder Agreements
If you’re planning to bring in co-founders, investors, or employees with equity, it’s essential to think about ownership and future flexibility:
- Who Owns What?
Define share ownership early and clearly. Ambiguity around this can lead to disputes down the road. - Equity for Growth
Retain a portion of equity for future use—whether for new investors, employee share options, or other needs. It’s much harder to reclaim equity once it’s been issued, so plan ahead. - Different Classes of Shares
If you plan to issue dividends to certain shareholders but not others, or to offer different voting rights, consider creating multiple classes of shares. This adds complexity but can provide flexibility in managing distributions.
Financial Compliance: Avoid Costly Mistakes
Once your business is up and running, staying on top of compliance is vital. Key deadlines include:
- Annual Accounts:
Limited companies must file accounts with Companies House within nine months of the end of the financial year. - Confirmation Statement:
This confirms the company’s key details, such as ownership and share structure. It’s due annually around the company’s formation date. - Tax Returns:
Corporation tax returns are due 12 months after the financial year-end, with payment due nine months and a day after the year-end. - VAT:
If you’re VAT-registered, returns are typically due quarterly. - Payroll (PAYE):
PAYE submissions must be made every time you pay employees.
To stay organised, diarise these deadlines and consider investing in accounting software to automate reminders and reporting.
Cash Flow is King
Cash flow is the lifeblood of your business. While profitability is essential, running out of cash is the number one reason start-ups fail. Here’s how to manage it effectively:
- Start with a Weekly Cash Flow Forecast
At the beginning, a 13-week rolling cash flow forecast will help you track inflows and outflows on a near-daily basis. As your business grows, supplement this with a monthly cash flow plan for the year ahead to anticipate larger expenses like tax bills. - Plan for Lumpy Expenses
Some costs, like annual insurance premiums or corporation tax, don’t hit monthly. Forecasting these early gives you time to prepare and avoid surprises. - Invoice Management
Make sure invoices are sent promptly and follow up on overdue payments. Delays in receiving cash can quickly spiral into bigger issues.
Choosing the Right Financial Systems
Using spreadsheets might seem easy at first, but as your business grows, it can lead to inefficiencies and errors. Modern accounting systems, like Xero or QuickBooks, can automate much of the heavy lifting, including VAT reporting, payroll, and financial forecasting. In addition, these systems are increasingly necessary as HMRC shifts toward more digital reporting requirements. Upcoming changes may even include more frequent corporation tax payments, so it’s wise to get set up sooner rather than later.
Outsourced Finance Functions: A Smart Move for Start-ups
Many start-ups can’t justify a full-time finance hire in the early stages. This is where outsourcing can make a big difference. Services like outsourced finance teams or fractional CFOs can provide critical support, including:
- Setting up financial processes
- Producing management accounts and forecasts
- Overseeing cash flow
- Advising on tax strategies
Building for Growth
As your business grows, your financial needs will evolve. This could include:
- Introducing KPIs (Key Performance Indicators) to track performance
- Creating detailed management reports
- Building more sophisticated forecasting models
- Structuring incentives like share options for employees
While these might not be necessary on day one, a good financial business partner will help guide you through the process and ensure you’re ready for each stage of growth.
Final Thoughts
Starting a business is a thrilling journey, but it’s one that requires careful planning—especially when it comes to finance. By getting your structure, compliance, and cash flow under control from the outset, you’ll set your business up for long-term success.
Whether you’re unsure how to structure equity, struggling with cash flow planning, or need help implementing financial systems, ACC can provide the clarity and support you need. If you’re unsure about your finances, and want to chat with an experienced CFO, just get in touch for a free financial assessment.
