Starting your own business: Accounting for SMEs

20 December 2019

​UHY Hacker Young's Corporate Tax director, Nikhil Oza, explains some important financial steps to take when starting your own business, as part of our Accounting for SMEs Q&A series.

I’ve been working a salaried job, but I want to take the leap and start my own business. What financial things do I need to have in order before I do that?

Firstly, congratulations on deciding to take the entrepreneurial leap! When starting a new business, there are a multitude of financial matters that require your attention. I have listed some of the main ones below, but the key, as always, is knowing when to turn to professionals (lawyers, financial advisers, accountants, etc.) for help.

Have a business plan

This is incredibly important, but not many start-up businesses take the time to do it properly (or at all). Projecting your expected revenue against expected costs will allow you to focus your efforts on your long-term goals whilst maintaining a healthy cash flow. Financial modelling will allow you to determine when you might break even and start making profits. This is vital if you are seeking outside investment in your business.

Funding your business

Have you already saved up some money or will you need significant outside investment or loans in order to get the business up and running? It is worth discussing this with your accountant, if you have one, especially to determine the tax benefits of each. Some options are only available if you have a limited company, such as raising finance under the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS), which can be more attractive to potential investors as they will receive tax breaks. Just remember that you will be giving up equity in your company under SEIS/EIS and you need to be comfortable with that.

Business expenditure

Whether you are going to be self-employed or operate via a company, it is important to keep business and personal income and expenditure separate. Your accountant will help you with this, but a basic starting point is setting up a new bank account for the business and ensuring all business cash flows are routed therein.

Are you starting up a new company and doing something innovative?

If so, you may be able to claim the valuable and generous Research and Development (R&D) Tax Relief. It is important to give this some consideration from the outset as there are time limits within which you must claim. R&D Tax Relief offers the potential for a cash repayment from HMRC if the company is loss-making and various conditions are met. Similarly, if you are developing a new video game, you could be eligible for Video Games Tax Relief (VGTR). Again, this offers a cash repayment which can be vital in the early years of your company’s life. Speak to your accountant or download our R&D tax relief guide to learn more.

I’ve just started freelancing, how do I figure out how to price myself? Should I be charging tax to my clients?

Unfortunately, there is no golden rule for working out what to charge clients. The price you charge would be dependent on many factors, including but not limited to: your experience, what the project entails and, of course, what the client is willing to pay! However, it is important to ensure that you do not overcharge or more importantly undersell yourself.

The price you charge needs to reflect:

  • your experience and level of expertise
  • your ongoing costs (rent, utility bills, supplies, equipment, travel, etc.)
  • an appropriate level of profit for you – your income ideally needs to exceed your costs!
  • saving towards a pension
  • building up spare cash in case you fall ill
  • non-working days
  • time spent doing business admin and pitching for new work

A helpful starting point when calculating the price is determining what an average annual salary for someone of your experience would be. Let’s say you’ve got a year of experience under your belt and would like to take home a salary of £26,000. You’ll be looking to work for 225 days of the year, discounting weekends and 28 days holiday per annum. Your simple day rate is £115.55 (£26,000/225 working days).

But this only accounts for billable time. If you want to build in spare capacity, you need to think about increasing the price, but within the constraints of what a potential customer would be willing to pay you.

However much you decide to charge clients, remember that any income you make will, of course, be subject to taxation and you may want to engage with an accountant to ensure you are deducting the right kinds of business expenses to lower your tax bill.

What's next?

We will be posting the next in our Accounting for SMEs Q&A series shortly so watch this space! Our next piece will focus on tax advice for self-employed professionals.

For more information on the issues mentioned above, or any other tax and accounting queries you may have, please contact Nikhil or your local UHY specialist.

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