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Having a solid foundation for the accounting of your business can lead to significant improvements in the success you will find in your business. As a business owner, it can be scary when facing the financials head on, but doing so will reap significant rewards.
It is a simple fact that 50 percent of businesses fail within the first year, and 95 percent fail within the first five years. A large contributing factor to that is the complexities surrounding correct accounting practices. Many new business owners can be naive about the implications, especially surrounding taxation when it comes to correct accounting for their business, and this can lead to a slippery slope ending in business failure.
The majority of business owners will be focussing on getting their business up and running, yet many forget about the essential nature of accountancy. Correct and accurate accounting is in the heart of every successful business. In order to be profitable (or at least report it accurately) you need to understand your finances and the financial management of your business from day one.
When in a poor economic scenario, it is the businesses which do not follow the basic fundamentals (and understand them) of accounting who will be hit the hardest. The financial management of your business can impact many different facets of the operations of the business, from your suppliers to your customers and employees.
Many view the professional guidance of an accountant as an unnecessary cost which is just decreasing the profit of the business (especially in the beginning, when revenue may not be so high). Regardless of the size of revenue, every business needs the professional advice of an accountant.
Here are some steps you can take to make sure your business is ready to produce accurate accounting from day one:
Hire an Accountant
This may seem really obvious, but getting the professional support and knowledge of a qualified accountant from the get go has immeasurably advantages to the future success of your business.
The years of knowledge and insight that a professional accountant has means that they can act as an advisor to your business throughout its journey. This means they can spot and advise on any financial problems which you may not have spotted.
An accountant will also stay on top of all of the latest tax and regulatory legislation. Believe me when I say it, you don’t want to get involved in doing that yourself.
Grow your Accounting Knowledge
Just as important as it is to hire a professional accountant, it can also be important to expand your knowledge of accounting. Having a good grasp of financials and financial management will have knock-on benefits to the operations of your business. It will teach you skills such as business valuation, profit margins, as well as being able to understand your business’ cash flow.
One of the key benefits here is also the increased ability to effectively communicate with your accountant and understand where they are coming from with their advice. Furthermore, fully understanding the financial aspects of your business will allow you to effectively communicate with any potential future investors when it comes to the valuation of your business.
Somewhat surprisingly, entrepreneurs often don’t invest any time into understanding the financial basics of their business. However, turning a blind eye is just setting the business up for failure, or at best, you’re making business life difficult for yourself.
Understand the Pros & Cons of the Business Entity
Sole trader? Limited company? It is wise to understand the pros and cons for each business structure and understand exactly what your business needs are now, as well as in the future. The decision which you make will have significant impacts upon what records and accounts you will need to keep.
There are clear benefits to running a Limited company, but it does come with the downside of extra regulatory reporting. Depending on where you foresee the business going in the future, you may not be willing to go down this route.
Understand How You’ll Pay Yourself
In somewhat of a linkage to your business entity, you will need to decide how you pay yourself. However, the business entity you choose may determine what you wish to do.
A sole trader will report their earnings as if they were the income of the owner. However, the owner of a limited company is effectively an employee of the business. Therefore, you could pay yourself a minimal amount from the business, and only pay income tax on your actual ‘salary’.
To labour the point, this is why hiring an accountant can be priceless. They are able to discuss the pros and cons of each option and allow you to see the clear path in order to keep your mind at ease, and let you focus on the important aspect of actually running your business.
Learn about Tax Obligations
As with many aspects of the business world, your tax obligations will depend entirely on the legal structure of your business. There are also other things to consider, such as VAT or other taxes on your products or services.
Do you need to collect VAT? Do you need VAT refunds? Are you importing goods, and therefore need to pay customs duty? This can all get pretty complex, and you should always consult a professional on any areas you’re not absolutely certain on.
Improve and Grow
As with most things in life, the key to success in business is learning and improving. All the pieces of advice above are important to managing your business and being successful with your accounting. It will take some time to get used to it if it isn’t in your expertise. However, if you get the ball rolling from the start, the benefits will pay dividends over the years for your business.
As recommended, if you find yourself falling behind on the bookkeeping of the business, or struggle to focus on the important aspects of your finances, then it is time to get an accountant. As your business grows, your need for an accountant will also likely grow. However, if you continue to learn, the experiences from being a business owner will likely make the accounting process simpler and faster over time. Especially if you have laid the foundations of the advice mentioned above.
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