The UK encompasses a highly regulated environment and it is important to be able to navigate its various requirements.
In this module we address the key areas one should be aware of when setting up a business in the UK with regards to personal considerations, business considerations and financial management of your company.
The objective of this module is to provide an overview of the key issues you should be aware of with respect to living and setting up a business in the United Kingdom. The elements that will be covered relate to the following:
- content from an individual’s perspective, including personal tax and related areas
- content relating to setting-up a limited company in the UK and compliance requirements, including details on the various business taxes for consideration
- content relating to effective financial management of a company and business, including financial statements, business plans, budgeting & forecasting and related matters.
So what do you as an individual need to be aware of?
The UK tax system is administered by Her Majesty’s Revenue and Customs. This is known as HMRC.
For UK tax purposes, it’s important to know if you’re a UK resident or not. This will affect:
- your UK tax liability
- your entitlement to Income Tax allowances and exemptions
There are two different concepts in UK tax law in relation to individuals. One of these is domicile, your place of origin, and the other is residence. These can involve different tax treatments.
Your domicile is usually the country your father considered his permanent home when you were born. If you intend to live permanently in this country, then you will acquire a domicile of choice here. If not, you will retain your domicile of origin.
Your residence is the country where you live.
It is possible to be either domiciled and resident in the UK, or non-domiciled and resident.
- Whether you are a UK Resident can be ascertained by the Statutory Residence Test (SRT). This test looks at the amount of time you spend and, where relevant, work in the UK and the connections you have with the UK.
The test allows you to work out your residence status for a tax year. The UK tax year runs from 6th April in one year to 5th April the next. We are currently in the tax year ending on 5th April 2024, referred to as 2023/24.
Each tax year is looked at separately, so it is possible to be resident in the UK in one tax year but not the next, or vice versa.
Further details on the Statutory Residence Test can be found at the following link:
However, note that if you have been in the UK for 183 or more days in a tax year you will be treated as a UK resident. There is no need to consider any other test.
Your UK domicile status affects whether you need to pay tax in the UK on your foreign income and capital gains.
Non-domiciled individuals only pay tax on their UK income and capital gains – they do not pay UK tax on their foreign income or capital gains unless they bring them here.
This status changes after you have been in the UK for a number years and if you are not intending to live permanently in the UK you may need further advice in this area.
Individuals who are both domiciled and resident in the UK pay UK tax on all their income and capital gains, whether they arise in the UK or abroad and whether or not the income or gains are brought here.
This means that some of your income or gains may suffer tax twice, once in the country of origin and once in the UK.
In many cases, however, relief is given in the UK for foreign tax paid on foreign income and gains under the provisions of Double Taxation Agreements, arrangements made between countries to alleviate this that determine where tax should be paid.
- If you are UK resident but not domiciled in the UK there are special rules which might apply to your foreign income and gains. In these circumstances you’ve a choice of whether to use the arising basis of taxation or the remittance basis of taxation.
Registration with the UK tax authorities
New arrivals to the UK are integrated into HMRC Tax Authority processes by the following means:
- If you are employed (either by your own or another company) – through the payroll scheme of that company.
- If you are self-employed (ie you do not work for a company or have your own), registration is required by completing form CWF1.
- If you are not employed or self-employed, but have income or capital gains to report to HMRC, the SA1 registration process should be used.
How much tax you pay in each tax year depends on:
- how much of your income is above your Personal Allowance
- how much of your income falls within each tax band
- whether or not you have taxable capital gains
Some income is tax-free.
As mentioned earlier, the tax year in the UK runs from 6 April to 5 April each year. We will be going in to the tax year from 6 April 2023 to 5 April 2024, known as “2023/24”.
Your tax-free Personal Allowance
The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.
Income Tax rates and bands
The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,500.
Income tax bands are different if you live in Scotland.
You do not get a Personal Allowance on taxable income over £125,140.
Tax on Capital Gains
Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
It’s the gain you make that’s taxed, not the amount of money you receive.
Some assets are tax-free.
You also do not have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.
The Capital Gains tax-free allowance is:
- £3,000 for trusts
You need to keep records if you have to send HM Revenue and Customs (HMRC) a Self-Assessment tax return.
You’ll need your records to fill in your tax return correctly. If HMRC checks your tax return, they may ask for the documents.
The link below contains further information on Capital gains tax and how to compute it:
You pay National Insurance contributions to qualify for certain benefits and the State Pension.
If you’re employed, you pay Class 1 National Insurance contributions. The rates for most people for the tax year 2023 to 2024 are:
- earning £242 to £967 a week (£1,048 to £4,189 a month) – 12%
- earning over £967 a week (£4,189 a month) – 2%
You may be able to pay voluntary contributions to avoid gaps in your National Insurance record if you:
- have profits of less than £6,725 a year from your self-employment
- have a specific job (such as an examiner or business owner in property or land) and you do not pay Class 2 National Insurance through Self Assessment
You may be able to pay voluntary contributions to avoid gaps in your NI contributions.
You need a National Insurance number before you can start paying National Insurance contributions.
To apply for your first National Insurance number – you must have the right to work or study in the UK.
WHERE/ HOW DO I APPLY FOR AN NI NUMBER?
To apply for a National Insurance number you must: be in the UK, have the right to work or right to study in the UK. Call the National Insurance number application line to apply. National Insurance number application line (England, Scotland and Wales) Telephone: 0800 141 2075. Textphone: 0800 141 2438.
A financial plan is a document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals.
A financial plan may be created independently or with the help of a certified financial planner.
In either case, it begins with a thorough evaluation of the individual’s current financial state and future expectations.
The plan starts with a calculation of the person’s current net worth and cash flow and ends with a strategy.
The plan should be comprehensive, but also highly individualized to reflect the individual’s personal and family situation, risk tolerance, and future expectations.
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan
A tax advisor would be able to assist with a tax reduction strategy, including estate planning.
There are no rules on how you must keep records. You can keep them on paper, digitally or as part of a software program (like book-keeping software).
HMRC can charge you a penalty if your records are not accurate, complete and readable.
Self-Assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax.
Tax is usually deducted automatically from salaries, wages, pensions and savings. People and businesses with other income must report it in a tax return.
If you need to send one, you fill it in after the end of the tax year (5 April) it applies to.
HM Revenue and Customs (HMRC) must receive your tax return and any money you owe by the deadline.
Deadlines for 2023/24 are as follows:
Self Assessment Deadline
Paper tax returns – Midnight 31 October 2023
Online tax return – Midnight 31 January 2024
Pay the tax you owe – Midnight 31 January 2024
There’s usually a second payment deadline of 31 July if you make advance payments towards your bill (known as ‘payments on account’).
You’ll pay a late filing penalty of £100 if your tax return is up to 3 months late.
You’ll have to pay more if it’s later, or if you pay your tax bill late.
You’ll be charged interest on late payments.
How long you should keep your records depends on whether you send your tax return before or after the deadline.
Personal Tax returns sent on or before the deadline
You should keep your records for at least 22 months after the end of the tax year the tax return is for.
Personal Tax returns sent after the deadline
You should keep your records for at least 15 months after you sent the tax return.
You must keep records about your business income and costs for longer if you’re self-employed.
You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.
HM Revenue and Customs (HMRC) may check your records to make sure you’re paying the right amount of tax.
Very late returns
If you send your tax return more than 4 years after the deadline, you’ll need to keep your records for 15 months after you send your tax return.
Register your company:
- You can register your private limited company online.
- You’ll get a ‘certificate of incorporation’. This confirms the company legally exists and shows the company number and date of formation.
- Registering a company provides certain protections to an individual, compared to trading as a sole trader, as a company is considered a separate legal entity.
Register for corporation Tax:
- You need to register for Corporation Tax with HM Revenue and Customs (HMRC) within 3 months of starting to do business.
- Register for Value Added Tax (VAT)
- This is a sales tax that is applied to most UK businesses that sell goods or services, but there are some exemptions.
- You must register your business for VAT with HM Revenue and Customs (HMRC) if its taxable turnover is more than £85,000.
- VAT registered businesses that turn over £85,000 must also follow the rules for ‘Making Tax Digital for VAT’ (MTD) and register for MTD with HMRC.
Register a PAYE Scheme:
- Pay As You Earn (PAYE) is a scheme to deduct tax, National Insurance and pension contributions from an employee’s gross earnings.
- You will need to register as an employer with HM Revenue and Customs (HMRC) when you start employing staff, or using subcontractors for construction work.
- You must register even if you’re only employing yourself, for example as the only director of a limited company.
- You must register before the first payday. It can take up to 5 working days to get your employer PAYE reference number. You cannot register more than 2 months before you start paying people.
- Where you employ staff, you will need to comply with the Pension Regulators requirements governing pension contributions that the company needs to make on behalf of the staff.
- This is a relatively new requirement, which if not complied with can have a significant repercussion on the directors of the company.
- For example: to play music, sell food or to trade in the street
Business insurance can help protect business owners and independent professionals against everyday risks, such as mistakes, stock or premises damage, and legal costs (known as Liability insurance). Some policies can even protect against business interruption and supply chain breakdown.
Some types of business insurance are required by law:
- if you are an employer you are legally obliged to have employers’ liability insurance to cover the cost of compensating employees who are injured or become ill through work
- if your business uses motor vehicles you are legally obliged to have commercial motor insurance
- Some professions are required to have professional indemnity insurance by their professional bodies or regulators
Other types of business insurance are optional, such as:
- Commercial property insurance, which covers the cost of repairing or rebuilding your business premises, or replacing your stock or equipment.
- Liability insurance, which covers the cost of compensation claims following fault or negligence brought against you or your business by clients, customers, shareholders, investors, or members of the public.
- Cyber insurance, which covers you for losses relating to damage to, or loss of information from, IT systems and networks.
- As an employer, you normally have to operate a PAYE Scheme as part of your payroll.
- PAYE, short for Pay As You Earn, is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.
- Payroll processing runs in line with the Tax Year relevant to individuals – 6 April to 5 April each year.
- At the end of the relevant tax year there are year-end procedures to close the year and to produce certificates of pay and tax deducted (Forms P60) to give to the staff for their records.
You can operate a payroll by either:
- paying a payroll provider to do it for you;
- doing it yourself using specialist payroll software.
Paying a payroll provider
- If you decide to pay a payroll provider (either a bureau or accountant) to run your payroll, you’ll need to consider how much support you’ll need.
- You are responsible for collecting and keeping records of your employee’s details. Your payroll provider will need these to run a payroll for you.
- Some payroll providers can offer you more support if you need it, for example keeping employee records, providing payslips and making payments to HM Revenue and Customs (HMRC) & attending to the pension auto-enrolment requirements.
- As an employer, you are legally responsible for completing all PAYE tasks – even if you pay someone else to do them.
Value Added Tax is charged on most goods and services that are bought and sold. Businesses can add VAT to the prices they charge on the goods and services they sell to their customers.
VAT registration is compulsory if:
- Your company generates taxable income in a 12-month period that exceeds the VAT threshold. The current VAT threshold is £85,000.
Once registered, you’ll be sent a VAT registration certificate. This confirms:
- your VAT number
- when to submit your first VAT Return and payment
- your ‘effective date of registration’ – this depends on the date you went over the threshold or is the date you asked to register if it was voluntary.
You can register voluntarily if your turnover is less than £85,000, unless everything you sell is exempt. You’ll have certain responsibilities if you register for VAT.
You can reclaim the VAT you’ve paid on certain purchases made before you registered.
Your VAT responsibilities:
From your effective date of registration you must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep VAT records and a VAT account.
While you wait:
- You cannot charge or show VAT on your invoices until you get your VAT number. However, you’ll still have to pay the VAT to HMRC for this period.
- You should increase your prices to allow for this and tell your customers why.
- Once you’ve got your VAT number you can then reissue the invoices showing the VAT.
You must pay Corporation Tax on profits from doing business as:
- a limited company
- any foreign company with a UK branch or office
The main corporation tax rate will increase from 19% to 25 with effect from 1 April 2023.
If your company made more than £250,000 profit, you’ll pay the main rate of Corporation Tax.
If your company made a profit of £50,000 or less, you’ll pay the ‘small profits rate’, which is 19%.
[From 1 April 2015 to 31 March 2023, a single rate of Corporation Tax applied to all companies].
Work out your profits when you prepare your Company Tax Return.
If more than one rate applies in your accounting period:
Work out how many days each rate applied, then work out the tax due for each.
For example, if your accounting period is 1 January 2023 to 31 December 2023 you pay:
- the rate for the financial year starting 1 April 2022 for 90 days (1 January 2023 to 31 March 2023)
- the rate for the financial year starting 1 April 2023 for 275 days (1 April 2023 to 31 December 2023)
You don’t get a bill for Corporation Tax. There are specific things you must do to work out, pay and report your tax.
You may be able to get deductions or claim tax credits on your Corporation Tax. These are known as allowances and reliefs.
Paying your corporation tax bill:
Taxable profits of up to £1.5 million
You must pay your Corporation Tax 9 months and 1 day after the end of your accounting period. Your accounting period is usually your financial year, but you may have 2 accounting periods in the year you set up your company.
Taxable profits of more than £1.5 million
You must pay your Corporation Tax in instalments.
You must keep:
- records about the company itself
- financial and accounting records
You can hire a professional (for example, an accountant) to help you with maintaining the company’s accounting records and corporation tax returns & related matters.
HM Revenue and Customs (HMRC) may check your records to make sure you’re paying the right amount of tax.
You can be fined £3,000 by HMRC or disqualified as a company director if you do not keep accounting records.
How long do you need to keep records?
You must keep records for 6 years from the end of the last company financial year they relate to, or longer if:
- they show a transaction that covers more than one of the company’s accounting periods
- the company has bought something that it expects to last more than 6 years, like equipment or machinery
- you sent your Company Tax Return in late
- HMRC has started a compliance check into your Company Tax Return.
Once a company has been incorporated at Companies House there are annual filings that need to be made with respect to the company:
The Confirmation statement:
- the confirmation statement exists to make sure the details Companies House have about your company are up to date. All limited companies need to send a confirmation statement once every 12 months (at least), even if the company is dormant.
Annual Statutory Accounts:
- File first accounts with Companies House – 21 months after the date you registered with Companies House.
- File annual accounts with Companies House – 9 months after your company’s financial year ends.
- You’ll have to pay penalties if you do not file your accounts with Companies House by the deadline.
- You can be fined and your company struck off the register if you do not send Companies House your accounts or confirmation statement.
- You can choose to do your own accounting for your limited company, including preparing and filing your annual accounts. However, most limited companies hire an accountant to manage their financial matters, as it can be difficult to do everything yourself, and there are severe penalties if you make a mistake.
- Registering with HMRC – to receive your Unique Taxpayer Reference (UTR). You will need to use this for all tax related matters.
- Corporation tax and Company Tax Returns – HMRC requires a Company Tax Return every year, even if your company fails to make a profit. You must deliver tax returns online on form CT600, with full statutory accounts and accurate computations and calculations detailing how the final figures were worked out. These are submitted via an electronic readable iXBRL format. You may wish to hire an accountant to assist with these.
- Paying corporation tax – Corporation tax is charged on all taxable income after the deduction of salaries, wages, costs, expenses and reliefs. You will not receive a tax bill from HMRC – you are responsible for working out how much tax your company owes every year by preparing annual accounts. Most small companies can use HMRC’s online accounts template, but it may be worth hiring an accountant if you have no experience in this area.
You must submit the relevant corporation tax payment to HMRC electronically – you cannot pay by post. Bear in mind the amount of time required for payments to reach HMRC. If your payment arrives late, you may be fined. However, if you pay your tax early, HMRC will pay you interest.
- Deadlines – Your corporation tax payment deadline will fall before the deadline for sending your Company Tax Return:
- You must pay corporation tax no later than 9 months and 1 day after the end of each accounting period.
- You must file a Company Tax Return no later than 12 months after the end of each accounting period.
- Full statutory accounts must be included with the Company Tax Return.
- Dormant company requirements
- If your company is inactive (dormant/not trading) you will not have to prepare a Company Tax Return or annual accounts for HMRC provided your company has been dormant for the entirety of its accounting period, nor will you have any corporation tax liabilities. You will still be required to complete dormant company accounts for Companies House.
- You must notify HMRC as soon as possible after company formation if your company is not trading, otherwise you may be asked to prepare a Company Tax Return. You can report your company’s dormant trading status by contacting your local corporation tax office – you will find their details on any official letter you receive from HMRC regarding tax.
- VAT returns – submit VAT returns on a quarterly or monthly basis based on what has been agreed with HMRC. You can seek the assistance of an accountant should you require this.
- Registering as an employer – which we discussed earlier. PAYE & NI contributions for all employees need to be paid over to HMRC on a monthly basis.
Impact of non-compliance
- As mentioned previously, the impact of non-compliance of the deadlines above and/ or payment of amounts owing to HMRC will result in penalties and interest being charged to the company.
HMRC describe EIS as being designed so that your company can raise money to help grow your business whereas SEIS is targeted at the smaller company when it’s starting to trade. SEIS relief is more generous than EIS to reflect the additional risks that these investments carry.
EIS is a Scheme designed so that your company can raise money to help grow your business by offering tax relief to individual investors who buy new shares in your company.
An EMI scheme is a tax advantaged share scheme that can be operated by qualifying independent trading companies with assets of £30 million or less.
EMI share options can be granted to eligible employees.
You must tell HMRC about a grant of an EMI share option by submitting an EMI notification within 92 days of the date of the grant, or you risk losing any tax benefits for you and your employees.
You need to tell HMRC about your EMI scheme before you can submit an EMI notification.
Within 7 days of registering your scheme you’ll receive a reference number. When you have it, you can tell HMRC about the grant of an EMI option.
Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology.
It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
You may be able to claim Corporation Tax relief if your project meets HMRC’s definition of R&D.
There are different types of R&D relief, depending on the size of the company and if the project has been subcontracted or not.
There is nothing quite like a plan – and every business has one. Whether it is in the mind of the entrepreneur, a hastily written to-do list or a more traditional document, it is the plan that dictates what happens in a business every day.
For a start-up entrepreneur, with no need for funding, one might be tempted to think that writing a formal plan is a waste of time, an unwelcome diversion of energy – but it is an important process.
Over the years there are examples of potentially great ideas falling by the wayside through the lack of a coherent plan or roadmap. Businesses start up and spend significant sums, only to find that insufficient research had been carried out and their business model was fundamentally flawed.
So the general rule is that if you fail to plan, you plan to fail. This is because a properly executed business-planning process will make you consider a host of issues that might otherwise slip under the radar.
Business plans are a fundamental part of the management process – It helps management understand where they’ve come from, assess where they are going and how they’re going to get there. A carefully researched roadmap can provide focus, prevent business drift and reduce risk. It will help to prioritise, set and achieve goals.
Business plans should not be written and put in the bottom drawer. They are living documents that need reviewing and updating on a regular basis, enabling you to focus on the right priorities at the right time and moving each area and function of your business towards your chosen goals.
Business plans come in many shapes and sizes. They can also be written for a number of different audiences or purposes. It is important to consider what you are trying to achieve.
A strategic plan may focus on high-level options and key priorities.
A financing plan may focus on sales, profit and loss and cash flow.
An operational plan may look at responsibilities, targets and milestones.
Before you start documenting your plan, you will need to carry out detailed research and amass your supporting evidence. Without knowledge and understanding, it is impossible to evaluate, benchmark, define or establish anything.
For example: If you are writing a business plan to raise equity finance, your plan will essentially be selling the opportunity; pitching valid reasons why an investor should invest, and providing a compelling rationale. If the investor has to ask too many questions, the implications is that the plan is deficient. The plan will therefore need both depth and detail.
You need to have market data, competitor analysis and facts that back up your assumptions and financial projections.
A business owner needs to own and live their business plan.
One of the reasons that entrepreneurs don’t relish the process of writing a business plan is because it can be a daunting task. However, it can be perfectly manageable if you focus on it section by section.
Nobody wants to read a 100-page document. A business plan needs to convince you, your team and/ or your backers that your business is viable, your opportunity is exciting and your projections are realistic.
Be aware of who you are writing your business plan for, and why, to ensure that the content is relevant and fulfils its objectives.
Justify your assumptions and forecast outcomes with a clear narrative, supported by relevant, factual data.
The goal should be to keep business plans concise, clear and compelling.
The reality is, that even when it is finished, a business plan is always a work in progress. It should evolve and adapt with your business, responding to changes in market conditions.
There is a relatively established methodology to writing a business plan into the following sections:
- An Executive Summary
- The executive summary gives a brief overview of everything that follows.
- It should deliver the main headlines and enable any reader to immediately understand the purpose of the plan as well as any financing sought.
- The content should include a brief company history and track record, a summary of the market, the opportunity and the competition, details of your key management team and some summarised financial information.
- If the plan’s purpose is to seek equity investment, the exit strategy should also be discussed.
- Be aware that many people decide whether or not to read the entire plan on the basis of the quality of the executive summary, so make sure it’s compelling and clear.
- The Business: History/ Model/ Opportunity/ Future plans and Goals
- This section describes who you are, where you’ve come from, what you do and where you are heading.
- It will summarise the history, achievements and current position of the business, as well as its ownership structure.
- It will also outline the future opportunity. This opportunity and how you will access it, will typically be the main focus of the overall plan.
- Your Business Strategy and Action plan
- This explains your vision and strategy, as well as the tactics you will use to move the business forward.
- It will focus on the strength of the business (ie. Its strong foundations) and explain the opportunity that the management team wish to pursue.
- It will outline the benefits of pursuing the opportunity (eg. Developing a new product, accessing a new market, acquiring another business, commencing international operations) and consider the benefits and risks involved.
- Your Team and Management structure
- This section specifies the skills, credentials and experience that you, your team and your advisors have, as well as any recruitment, training and retention plans that you have or intend to put in place.
- The management team is considered by investors and lenders as the key factor in any business plan. They believe that the ultimate success of the business will depend on the skill and experience of this team.
- Intended management changes and succession planning should also be covered here.
- Your Operations and Administration
- This outlines your premises and production facilities, your assets, and the IT and management systems that help with the smooth running of your business.
- It also defines the mechanisms, processes and reporting systems you have in place to track, control and improve your performance.
- Your Products and Services
- This describes your products and/ or services, including your value proposition and USP – why customers buy from you and why you are (or will be) successful.
- It will also consider how products are sourced or manufactured, as well as the product or service life cycle.
- The Market
- This contains market research detailing the market size and your existing/ potential market share in specific sectors; it identifies key trends and drivers in your sector, including windows of opportunity and chances to increase your market share.
- It considers wider trends in the market and how these may affect your business in the future.
- It profiles your competition, their share of the market and your customers/ target audience.
- Essentially, it compares your business to other existing and potential competing businesses, and defines your competitive ‘unfair’ advantage.
- Your Marketing Plan
- This includes the methods you’ll use to reach, attract and retain your customers.
- It outlines your positioning in the market, how you are pricing and promoting your products and/ or services, where and how you will drive future sales and how you will deliver excellence and after-sales customer service.
- It also outlines details of any strategic alliances or distribution partners.
- SWOT Analysis
- This provides an analysis of your main strengths, weaknesses, opportunities and threats.
- It explains how you will reduce risk by tackling threats and overcoming weaknesses and what you are doing in order to seize opportunities and play to your strengths.
- This can be used to turn a disadvantage to an advantage – by highlighting your internal weaknesses and external business threats and explaining how you will deal with them.
- Financial Statements and Forecasts
- This summarises historic and forecasted financial information, including integrated profit, cash flow and balance sheet forecasts for the next (say) 36 months.
- It considers any financial issues or changes arising either in the existing market or as a result of pursuing the new opportunity.
- It details banking and financing arrangements and sets out the required funding and how it will be used.
- Typically it allows for funding headroom – an unspecified amount to be added to the fund raising – to cover uncertainty and contingencies.
- The key here is to convince investors and/ or lenders that you will not run out of cash.
- You will be expected to have a good understanding and a strong grip on your finances.
- Lenders and investors will only be prepared to offer you funding if they can see a clear way of getting it back!
- It’s therefore crucial to have robust and supportable financial information in your business plan, and also crucial that you understand it.
- It may be that another member of your team, or an external advisor, has assisted in the preparation of the information. But you should understand all of the key figures and how they have been derived.
- It is easy to pick holes in financial figures.
- With modern spreadsheet techniques and templates, it’s not difficult to fill in the forms. But it is often the assumptions or what has not been thought of that causes the problems.
- As an example: We once had a client with a plan to import a particular item of clothing that they were going to be able to source & deliver far more cheaply than any other visible competition. With a price point just below that of their competitors, they were sure to sell shed loads of their products at incredible margins. After making trips overseas, negotiating supply agreements and considering sales plans, all involving weeks & weeks of work, our firm were finally asked to look at the numbers. It did not take long to see that the business had completely underestimated its freight charges and simply forgotten to allow for import duties. The impact of these two discoveries decimated the margin and made the business model marginal. The business then never went ahead with this.
- Another golden rule in business is that everything always takes longer and costs more than you think it will. Notwithstanding this, passionate entrepreneurs are prone to demonstrating over-confidence about the likely levels of demand for their product. This can lead to the ultimate business sin – running out of cash.
- Beware of using valuations in business plans. They are rarely of benefit.
- We recommend you preparing at least three versions of your forecasts: Realistic, Optimistic & Pessimistic versions. This will allow for scenario planning, by showing various financial outcomes to each scenario. So with all the possible scenarios that could materialise being showcased – an informed decision can be made.
- Use appendices to provide detailed information.
- These can provide CVs of key team members, organisation charts, product literature, key contracts and details of IP protection.
- They can also provide more detailed financial analysis, market research reports or other relevant information.
Templates for Business Plans can be found on-line:
- The Business Plan Shop
- Business in a Box
We cannot underestimate the importance of sound Financial Management.
Running a business requires a business owner, Co-Founder or Director to be on top of the finances of the business to be able to navigate all stages of the business lifecycle. So Financial management is key.
Financial management covers a broad spectrum of areas – each important in their own right.
The importance of financial records for a business cannot be emphasised enough.
A business that doesn’t understand its financial position is flying blind.
Businesses do not go bust because of a lack of profitability. They go bust because they run out of cash! So cash is king!
The recording & tracking of results is key.
Bookkeeping – every business should keep proper accounting records. These can be created in electronic form through the use of accounting software. The most popular ones currently in use are Xero & QuickBooks on-line, which are cloud platforms.Bookkeeping is the process of inputting data into the accounting software.
These would enable the regular preparation of management accounts, probably drawn up monthly and typically consisting of a profit and loss account, a balance sheet and a cash flow statement.
Profit & loss statement – Once all transactions have been captured within the accounting software a Profit & loss statement can be printed which shows the detail of the Revenue earned over a period versus the expenditure incurred for the same period.The net balance shows whether the business has made a profit or loss in the period covered.Balance sheet – gives a picture of the financial position of a company at month end or year end.The balance sheet shows details of the assets and liabilities of the company and the balance between them.If the assets exceed the liabilities there is some net worth within the business.If the liabilities exceed the assets there is a net liabilities position, which may indicate insolvency – so it is important to be aware.Every limited company is required by law to produce financial statements, which are also available for anyone to inspect if they so wish at Companies House.A set of financial statements typically can include the following statements:
- A Directors report
- An Accountants’ report
- A Profit & loss statement or Income statement
- A Balance sheet
- A Cash flow statement
- A Statement of Changes in Equity
- Notes to the Financial Statements
Generally Accepted Accounting Practice in the UK, or UK GAAP, is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom.Companies have a choice of preparing their financial statements using a number of methods:
These can be used dependent on a number of criteria that need to be in place.
Assets & Liabilities
Assets – Assets are generally split into two main categories, Fixed assets & Current assets.
Fixed assets – These are capital assets that are used by the business to carry out its trade.
They typically include tangible assets like freehold or leasehold property, plant and equipment, fixtures & fittings and motor vehicles.
These assets are known as fixed assets because they have a permanent presence in the business and are generally not readily turned into cash.
Fixed assets can also include intangible assets, such as designs, copyrights, trademarks, patents and goodwill.
Current assets – These are assets that are or will turn into cash within a relatively short period.
They include stock, work in progress debtors and cash.
Ultimately, it is these assets that will feed into your cash flow and enable you to pay your staff and your suppliers.
On the liability side, balance sheets tend to differentiate between short-term creditors (current liabilities) and long-term creditors (creditors due after more than one year or longer-term liabilities).
Current liabilities – These are liabilities that are due for payment within a shorter time frame, or where payment can be demanded at short notice, such as a bank overdraft.
They include your suppliers’ invoices and other liabilities, such as taxes on your payroll.
Current liabilities typically consist of the creditors that will be paid from the cash realised from your current assets.
Long-term liabilities – are those which are not payable now, but which will have to be paid in due course, typically a year or more from the balance sheet date.
Bank loans that are repayable over more than one year are often a feature here, along with other longer-term financing, if this exists.
From the above, it can be seen that the key balance sheet numbers that affect the day-to-day running of your business are your current assets and current liabilities.
Together these form the “Working capital” of your business and determine its continuing ability to trade.
Solvency is the possession of assets in excess of liabilities and the ability to pay one’s debts.Therefore, it is the ability of a company to meet its long-term debts and financial obligations. Solvency is essential to staying in business as it demonstrates a company’s ability to continue operations into the foreseeable future. Investors can use ratios to analyze a company’s solvency.Solvency often is confused with liquidity, but it is not the same thing. Liquidity is a short-term measure of a business, while solvency is a long-term measure.A liquidity issue occurs when a business has a temporary cash flow problem. A solvency crisis occurs when a business has debts that it can’t meet through its assets. i.e. even if it could sell all its assets, it would still be unable to repay its debts.Some of the most popular solvency ratios are: Debt-to-Equity (D/E) Debt to equity = Total debt / Total equityThis ratio indicates the degree of financial leverage being used by the business and includes both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain point, it may affect a company’s credit rating, making it more expensive to raise more debt.Debt-to-Assets Debt to assets = Total debt / Total assetsAnother leverage measure, this ratio quantifies the percentage of a company’s assets that have been financed with debt (short-term and long-term). A higher ratio indicates a greater degree of leverage, and consequently, financial risk.Interest Coverage Ratio Interest coverage ratio = Operating income (or EBIT) / Interest expenseThis ratio measures the company’s ability to meet the interest expense on its debt, which is equivalent to its earnings before interest and taxes (EBIT). The higher the ratio, the better the company’s ability to cover its interest expense.
The Cash Flow
Cash flow documents are typically forward-looking forecasts and can be used to identify future cash flow pressure points within a business.
However, some businesses prepare historic cash flow statements, showing the source of funds generated and how they have been spent. These statements can be useful to explain the reasons for increase or decreases in cash balances in your business.
For example: If your debtor balances increase, this tends to consume cash, unless creditor balances increase by a similar amount.
From this, it can be seen that slower debtor collection and faster creditor payment can create a double whammy from a cash flow perspective.
Historical cash flow statements will also show your expenditure on fixed assets, details of repayments of loans, tax payments and other useful information, such as new equity or debt funding.
Budgeting & forecasting are key tools to aid a business in forward planning.
It forms a fundamental element to understand and plan for the ups and downs in the business’ life cycle and to understand when cash shortfalls are likely to appear.
If bank financing or angel funding is required – it takes months to be able to get these in place.
There isn’t much difference between a budget and a forecast, except that a budget is normally fixed based on expectations at the outset, whereas a forecast is updated to reflect actual financial results and expectations as you go along.
This means that you can compare your actual performance against your original expectations and against your regularly updated forecast expectations.
Budgets and forecasts should consist of a set of integrated profit and loss, balance sheet and cash flow forecasts. The integration is crucial. It proves that the numbers are aligned and identifiable as they flow through from profit-and-loss account to balance sheet and cash flow.
Here are some Budgeting & Forecasting tips:
- Consider your track record of meeting budgets. If it is poor – work out what went wrong and avoid making the same mistake again.
- Do not be over-enthusiastic with your sales or income forecasts. No matter how good the service or product, revenue generation or increase in Sales can take longer than you think.
- Beware of potential omissions. Have you allowed for payroll and other taxes in the forecasts? What about staff bonuses? Are the legal fees set at an appropriate level or could these be exceeded? Have you allowed for potential currency fluctuations? And what about bad debts?
- Do not forget to allow for potential fixed-asset replacement, loan repayments, hire purchase, and interest costs.
- Round up rather than down when estimating costs, and down rather than up when estimating income.
- Make realistic assumptions around debtor and creditor days and stock movements.
- Build in a contingency and allow headroom to counter unexpected variances or problems.
- Ask yourself what if? Consider how sensitive your projections might be to external factors.
- Rehearse before presenting the budget to Banks or other Stakeholders.
- Once prepared, you should regularly review your actual results against your budgets, and update your forecasts with your actual results and new expectations. Where necessary take corrective action to protect your profits and cash flow.
Template for Budgeting & Forecasting – Free trials and templates that can help in compiling these are:
- Calxa – 3 way model including Balance sheet, Profit & Loss and Cash Flow Forecasts
- Canaree Finance – Financial modelling made simple
- A financial model in Excel – can also be used. These can be produced where one is proficient in Excel or a Professional advisor can be engaged to assist with putting this together.
- The case study assignment – for this module involves an Integrated financial model, which was prepared by an expert on such models. You will have instructions to navigate through this assignment to complete the tasks required. So this will provide you with exposure on what such a model entails.
All Business taxes should be incorporated within your Financial management reporting information, including Budgets, Forecasts and Cash flows, to ensure these are not missed – as they will form a key part of running any business.
Tax planning is an important consideration in any business too.
Business should consider:
- The timing of capital expenditure – to ensure claims to capital allowances are being maximised.
- Commercial property reliefs – If commercial property is built or acquired, consider whether there are any other reliefs available. These could be structural buildings allowances or integral fixtures so that the maximum tax relief on purchase is obtained.
- R&D reliefs – Have R&D reliefs been maximised for the company? R&D can provide valuable cash relief for qualifying expenditure.
Management information is key to the decision-making process for management.
Most businesses prepare management accounts on a monthly or quarterly basis. By the time these have been prepared and reviewed – valuable time will have passed. This may mean that corrective action required is delayed, adversely impacting on future profits and cash flow.
For this reason, many businesses develop systems to monitor their day-to-day progress, rather than waiting for historic information to be presented in their management accounts. These normally take the form of daily or weekly management reports which include financial information and other Key Performance Indicators to help the management team understand what is happening in the business and to shorten the decision-making process.
Some of the sort of financial information that may be given in these reports varies but may include:
- Details of daily or weekly sales, often compared to previous year, or to budget or forecast.
- Bank balances
- Debtor balances
- Creditor balances
- A Cash flow forecast.
These resources are of a general nature. The views expressed are not necessarily those of Evelyn Partners or any of its affiliates. No reproduction of these resources may be made in whole or in part for professional or recreational purposes. No action should be taken based on this presentation and Evelyn Partners accept no liability if we change your views on any of the subjects mentioned.
Tax legislation, sourced from HMRC, is that prevailing at the time, is subject to change without notice and depend on individual circumstances. Clients should always seek appropriate tax advice from their financial adviser.