Entrepreneurship

Managing your Accounts & Finances

For many people starting a business all they want to do is get out there, start making sales and getting clients but it is key to stay focused on the accounting of your business from the start.  If you do not actively manage debt, invoicing and expenses accurately, your business will have a high risk of sinking before you start to grow.  In this article we have put together some tips and useful links to help you when starting your accounts and doing your financial planning.

Accounting Basics

Accounting, like any industry is full of jargon, which can be daunting, you may have heard of terms like net/gross profit, profit and loss, balance sheet, forecasts etc.  But don’t worry, it is not as scary as it seems!  Click our jargon buster title below to reveal a brief glossary of accounting terms.  Even if you are looking to outsource the management of your accounts, it is still a good idea to gain a basic understanding of the terms and process to make the process easier. 

Accounting jargon-busting glossary of terms

Here are a few explanations of key phrases from High Speed Training to get you started:

Account:  The location where financial entries are recorded.  Different accounts exist for different financial transactions, e.g.  for sales and profit, and loss.

Assets:  All items owned by the company which helps them run, e.g.  money, equipment, land, buildings, vehicles, etc.

Balance sheet:  This is a report that summarises the business’ financial situation;  it details the assets, liabilities, and capital of the business. It also shows the balance of income and expenditure as of the date specified.  Balance sheets help highlight what the business owns and owes.

Cash flow:  The total amount of money going in and out of the business.

Cash flow forecast: This refers to planning the business’ future cash requirements.  It involves predicting how much money will come in and out of the business at any given point.

Expenses:  Costs that are incurred for the purpose of keeping the business running, excluding fixed assets.

Financial statements:  Reports made by a tax accountant at the end of the financial year, which indicate how well the business is doing and its value.  They are used to calculate the income tax that needs to be paid.

Gross profit:  A business’ total revenue minus the cost of sales.

Losses or Liability:  This means the debts owed by the business to other businesses, including accounts payable, loans, and credit card balances.

Net profit:  The result of deducting business expenses from the gross profit.

Managing your accounts

As a small business you can prepare your own accounts, if you are comfortable to do so.  Below, in the useful documents section, there are some example forms that Revenue Services in Guernsey have created to help with the process.  If you do not feel able to produce your own accounts you can appoint an accountant or bookkeeper to do them.  

Make a plan and create some targets

Depending on your business structure and idea you might not see a return straight away, using a tool such as a cash flow forecaster allows you to map out your costs and income over a period of time showing at what point you will start to make a profit.  You can use this to then make some goals for yourself, for example monthly income targets. 

Keep track of your income and outgoing

It is very important at all stages of your business to keep a close track on your income and outgoings, modern banking apps enable you to keep near to real time sight of your account.

Outgoings  -  Make sure you keep a record of all of your receipts and invoices to be paid, this will not only make it easier for your accounting and tax returns but also make sure you do not miss any invoices that you need to pay. 

Income  -  This is the most important part when starting a business, that is why it is crucial for you to keep on top of invoicing and be aware of which clients or customers have paid and which are still outstanding.  You may elect when starting to due days of 14 days on your invoices instead of 30 to enable you to keep on track with your income targets.

Accounting software

Like many areas of business technology has enabled the process to be simplified and accounting is no different.  There are many options of software available to assist you with the bookkeeping side of your business such as Quickbooks or Xero accounting.  These software packages allow you to enter receipts and invoice and putting it into the correct format making the process a whole lot easier.

What documents to hold / submit

You should keep a record of all your invoices and receipts, these do not have to be the physical copies it can be scanned version of them, the most important part is to keep them organised in a simple file structure.  This way if you need to find a specific item you can easily do so without having to go through mountains of paperwork.

Revenue Services have a guidance note here that covers what documents you should keep and how long for, it can be found here:

KEEPING RECORDS FOR INCOME TAX


Tax Returns

As a business you will need to submit your Income Tax return by 30th November each year.  Revenue Services have written a clear guidance page of what information needs to be submitted at what time here, it details the two formats for small businesses which are detailed below.

  • If your business earns over £15,000 then you can use the Trading Profit and Loss account Form (TPLA) below. 

Trading profit & loss account form

  • If your business earns under £15,000 a year then you will need only to submit a Three Line Account form which can be found below.

3 Line account Form

Looking for Funding 

If you have gone through the process of planning out your business you should have a clear idea of how much money it will take to start your business, this will vary for each business.  Depending on your business model there are several options available which are detailed below. 

It is important that you choose the method to suit your situation and take the time to research the different options available. 

Personal / Family Funding

If you have been planning your business for a while you may have saved up the initial investment you need into the business.  You may be lucky and a family member or friend may be willing to loan you the initial investment needed to start your business  -  in this case it is important that you identify the risks of their investment to them as well as setting out a written agreement between the two parties clearly stating the terms.

Business Bank Accounts (Overdrafts)

If you are not looking for an initial investment but your cash flow forecast highlights that you will make a loss before starting to make a profit, for example you may need to buy in stock to sell, then you may look to take out an overdraft.  Overdrafts provide a safety net to fund everyday expenses, however they have higher interest rates than loans.  The benefit is that you pay interest on the money that is overdrawn, not the full amount of a loan.  Make sure to check the terms of the overdraft when looking at the different options available especially the repayment terms.

Business Bank Loans

If you are looking for a set amount of money to start your business a bank loan might be a suitable option to take, allowing you to pay it back over a set time frame.  Before making a decision be sure to research the options available as different banks will offer different interest options, be sure to choose one that suits your needs.  If you choose to take a business loan make sure to add the monthly repayments into your budget and your cash flow forecast.

Private Investment (Angel / Venture Capitalist)

If your business requires a larger amount of finance you may look to approach an Angel Investor (wealthy individual) or Venture Capitalist (investment firm focusing on small/ early stage business), for investment. Both of these will often take out shares in the business in place of their investment, so you will give away some control and profits of your business to the investor.  Before approaching an investor you should have a full business plan written out highlighting the potential return for investment and be clear about what percentage of the business you are willing to give over.

Other Funding Options

There are other less common ways of funding the start of a business including options like crowdfunding where individuals will pay money for ‘rewards’ such as early access to products.  Each crowdfunding platform will have specific terms and conditions so make sure that you check whether it is suitable for your business circumstance before you choose this option.

Where to go for more help?

Check out our Start-up Hub for more information on support programmes and activities you can get involved in.  You can visit our Entrepreneurship page to read articles and listen to podcasts about how to start a business in Guernsey, including details about first steps, finances and marketing.  Or if you would like some one-to-one support from the Digital Greenhouse team, please fill in the enquiry form below or email team@digitalgreenhouse.gg

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