Self-employment : Managing finances

Your personal finances

To what extent your business thrives or fails may be dependent upon how you balance the books. Critical pre-trading activities of research, and market and product development can take valuable time well before the business provides you with a regular income. Answering the following questions will help you understand how you might maintain financial security during this period.

• Will I be working full time in the business?
• Will I have another source of income or savings to fall back on?
• Do I need the business to provide a full-time income from the start?
• How much do I need to live on every month?
• Do I know anyone who can give or lend me money?
• Do I know someone who has money who might join me or buy into the business?
• How quickly do I think I can generate sales?

Once you have understood your personal financial needs, you need to work out how you will control the finances that directly affect your business.

Cash flow

One of the most stressful aspects of self-employment as compared with being employed is that you cannot rely on a regular salary. Good cash flow is defined by a pattern of income and spending that allows a business to have cash available to pay bills and wages on time. Leasing of assets, equipment and machinery and negotiating early payments may help in this respect.

Profits

Check whether your prices are sustainable. Is it better for you to work with higher margins and fewer customers? Know your break-even position and how it changes with differing volumes of different products and services.

Overheads

Keep overheads to a minimum. If you need stock, hold the minimum needed. Constantly reviewing your overheads, be they premises, equipment or staffing costs, will protect you from insolvency.

Credit

Only give credit when it cannot be avoided. Beware of new customers asking for credit: check their credit/payment history with other suppliers and credit reference agencies.

Invoicing

Create a system that ensures invoices are for the correct amount, sent to the right person and followed up before they are due for payment. Know when you can expect payment into your account.

Bank accounts

Maintain a good relationship with your bank by keeping them informed. This may help if you need to raise money urgently or go overdrawn at short notice. Shop around, being clear about services offered, fees charged and new start-up incentives.

Taxation

As a business owner, you may be liable for several different taxes, including income tax, corporation tax, VAT, stamp duty and business rates. Go to HM Revenue & Customs (HMRC)  to find out more about what taxes will apply to you, how to calculate them and when to send your tax return to them.

New businesses can sometimes receive tax advantages on equipment, premises or for research and development. These incentives are not automatic. Check your eligibility and make an application.

Registering for VAT

If you supply goods and services with a value above an annual threshold (£73,000 from April 2011), you must register straightaway for value added tax (VAT) and pay it throughout the year at fixed intervals. Failure to do so incurs a fine which accumulates the longer the tax is unpaid. You may gain a tax advantage by registering voluntarily, even if your turnover is below the threshold.

Additional VAT is payable on imports and exports. Levels vary according to the nature of the goods and the countries involved.

Book-keeping and accounting

Meticulous record keeping is vital both to keep track of your business finances and to provide related evidence to HMRC, who will then calculate taxes you need to pay. HMRC and Business Link  run short courses across the country covering most finance-related issues. You will also find many simple templates on these and several high street banks’ websites that you can easily adapt.

Getting in and out of debt

It is likely, but not inevitable that you will need to take out loans both to start your business and, later, to expand it. If you get into difficulties, seek help straightaway, not when you are going under. Banks, accountants, tax personnel and business advisers may all be able to come up with strategies to get you out of trouble or avoid it altogether.