Starting a business is an exciting leap, but accounting can feel overwhelming. For many new business owners, managing finances is often the last thing on your mind. However, getting your accounting right from the start is crucial.

In this guide, we’ll walk you through the essentials every startup should know about accounting, from basic record-keeping to planning for growth. With some simple steps, you can establish solid financial habits that’ll serve you well as your business grows.

Setting up your record-keeping

Good accounting starts with good records. For every purchase, sale or financial interaction, maintaining a clear record will save you time, money and potential stress later on. Here’s how to approach it.

• Choose the right software: Many affordable cloud-based options, such as Xero, QuickBooks and FreeAgent, allow small businesses to track income and expenses. They also integrate with HMRC for Making Tax Digital (MTD) compliance, simplifying your VAT returns.
• Record every expense: Even if it seems trivial, record every business expense accurately. This is especially important for startups, as many initial expenses are tax-deductible, potentially reducing your taxable income. Regularly updating your records will also help prevent errors and provide a clear picture of your business’s finances.
• Separate personal and business finances: Setting up a dedicated business bank account is essential to prevent financial blurring between personal and business funds. A separate account makes it easier to manage cashflow, track expenses and comply with tax regulations.

By establishing these habits early, you’ll meet legal obligations and monitor cashflow, a critical factor for new businesses.

Choosing the right structure for tax efficiency

The structure of your business impacts your tax obligations and personal liability. There are a few common options in the UK.

• Sole trader: Operating as a sole trader is straightforward and involves less paperwork. You’re personally liable for debts, but as a small business, this may be manageable. Income tax is paid through self assessment, and you’ll need to register for VAT if your turnover exceeds £90,000.
• Limited company: A limited company offers liability protection, which means your personal assets are separate from business finances. While setting up and running a limited company involves more administration, it can be tax-efficient, especially if you plan to reinvest profits. Limited companies are taxed at a flat rate of 19% corporation tax, which may be lower than higher-income tax rates.
• Partnerships and LLPs: If you’re starting a business with others, a partnership or limited liability partnership (LLP) could be beneficial. With an LLP, partners’ liability is limited, while a traditional partnership means all partners are personally liable for business debts.

Choosing the right structure depends on your goals, potential risks and long-term strategy. A recent survey found that nearly 60% of UK entrepreneurs transitioning from sole trader to limited company saved an average of £8,000 per year in tax.

Tax deadlines and requirements

Missing tax deadlines can result in fines, something startups with tight budgets should avoid. Here’s an overview of essential tax deadlines to keep in mind.

• Self assessment (if applicable): Register with HMRC as self-employed and submit your self assessment by 31 January each year if you’re a sole trader or in a partnership.
• Corporation tax: Limited companies must file a corporation tax return (CT600) annually. The tax payment is due within nine months of the company’s financial year end.
• VAT (if applicable): If your turnover exceeds the £90,000 threshold, you must register for VAT and submit returns quarterly. MTD requirements mean you’ll need digital record-keeping and submission, which are often achievable through accounting software.
• Payroll obligations: If you hire employees, you need to register for PAYE and submit monthly to HMRC. PAYE returns include income tax, national insurance and, if applicable, workplace pension contributions.

Understanding and meeting these requirements helps ensure you avoid penalties and can focus more energy on growing your business.

Managing cashflow effectively

Cashflow is one of the biggest challenges for startups. Having a realistic cashflow projection and reviewing it regularly is crucial. To maintain positive cashflow you’ll need to do the following.

• Create realistic projections: Base your forecast on projected income, considering expected expenses like rent, equipment and salaries.
• Invoice promptly and follow up: Delayed invoicing can lead to cash shortages. Invoicing promptly and setting clear payment terms, such as 30-day payments, ensure clients know when to pay. Research shows that startups with consistent invoicing practices experience a 20% improvement in cashflow reliability.
• Control expenses carefully: Be mindful of initial expenses. Consider investing in essentials that provide a good return on investment but avoid large outlays that could strain cashflow too early on.

Good cashflow management keeps the business running smoothly and provides peace of mind that you’ll have the funds available for growth and unexpected challenges.

Understanding and tracking key financial metrics

For any business, but especially for startups, tracking key financial metrics can provide insights into performance and growth potential. Here are a few important ones to monitor.

• Gross profit margin: This shows how much money remains from sales after deducting the cost of goods sold. Aim to monitor and improve this margin as it reveals profitability trends.
• Net profit margin: This tells you how much profit remains after deducting all expenses. For startups, a low or negative net profit margin is common in the initial stages, but improving it should be a goal over time.
• Burn rate: Especially if you’ve secured funding, your burn rate (how quickly you’re using cash) helps gauge how long you can operate without additional revenue or funding.
• Customer acquisition cost (CAC) and lifetime value (LTV): The cost of acquiring a new customer versus the revenue they generate over time is crucial for assessing marketing efficiency. Tracking CAC and LTV gives insights into the effectiveness of your customer retention efforts.

Regularly reviewing these metrics provides insight into financial health and guides decision-making.

Preparing for growth

In the early days, the focus was often on survival, but preparing for growth was also wise. Startups that succeed tend to adapt quickly and are ready for changes. Here are a few ways to plan ahead.

• Build a financial buffer: Set aside a percentage of profits as a contingency fund. This financial buffer can cover unexpected expenses or provide capital for expansion.
• Streamline processes early on: Consider automating recurring tasks like payroll and inventory management to free up time and reduce human error.
• Seek advice: Whether through a mentor, a financial advisor or an accountant, getting advice can help you make better decisions and avoid common pitfalls. Research shows that startups that seek expert advice are 47% more likely to grow sustainably within the first five years.

At James Scott, we provide the guidance you need and ensure your accounting practices support your growth.

Get in touch to discuss your startup.