Why is accounting for a start-up business important?

Why do some start-ups succeed while others are doomed to fail?

It’s an often-quoted statistic that around 60% of businesses fail in their first three years – with 20% folding within just twelve months. 

But why?

You might think it’s got a lot to do with demand for the product or service the business provides. You’re not wrong – market demand is important. However, it’s far from the only thing a start-up needs to grow into a profitable enterprise.

The reality is many new businesses are started by beginners. They have a somewhat naïve approach, and even though they may have a decent plan, to begin with, they soon encounter pitfalls which means they, unfortunately, don’t survive.

The only real way to ensure you’re not making a common start-up mistake or tying yourself in knots with your accounts is to seek the services of a good accountant from the beginning. 

Here are some of the reasons why professional accounting for start-ups is so important.

Making a budget 

A start-up business is one in its earliest stages. This means that although you might be operational already, some of the finer details might not have been worked out yet – and this might include a proper, solid budget plan for the next 1 – 5 years.

A budget should include expenditure for advertising and marketing, product manufacture and materials, inventory, storage, employee hiring and salary costs, office costs, vehicle and transportation costs and more. It’s a good idea to divide these predicted costs into operational, one-off and capital expenses to determine if it’s going to be an ongoing cost for the business to bear.

Having a realistic financial forecast is something you’ll need if your business is going to approach lenders or investors. An accountant is the best person to help you do this, as they will have seen enough new businesses come and go to understand what the most common errors are. 

Raising finance 

All start-ups need to fund the initial costs of launching their business. Even if you’re running your business from your home initially and won’t be hiring employees yet, there are certain costs which you’ll probably need to find finance to cover. These include inventory, manufacturing materials and marketing.

Many start-up entrepreneurs rely on self-funding, or even borrowing from friends and relatives, to get their business going. 

Other options include things like small business loans from high street banks, as well as investment funds. If your start-up has great potential, you might be able to attract the help of a seed investor. There are organisations in the UK which exist to match investors with promising new start-ups, so this option is well worth exploring.

An accountant can walk you through your options then it comes to raising finance and help you understand the risks and benefits in your search for capital.

Day-to-day accounts

If you’re running a start-up business, things like chasing capital and actually developing your product or service probably seem like the ultimate priority.

Start-ups are all about rapid growth, which means you’ll be concentrating on ways to expand your business in those early stages. 

However, it’s also important to establish a robust accounting system from the very beginning, or risk problems down the line.

If you’ve started out using cash basis accounting as a sole trader or partnership, you’ll have to switch to traditional accounting once your turnover exceeds £150,000, or if you decide to start a limited company. This means that you must pay tax on recorded income from transactions even if you haven’t actually received the money yet. This is where the advice of an accountant comes in. Remember, good accounting and record-keeping will make your business more attractive 

A good accounting service will also provide you with a streamlined bookkeeping and invoicing service, to enable you to keep on top of your daily financial admin while you get on with nurturing your start-up.

Cash flow management

Cash flow is a crucial part of running a successful business, but it’s all too easy for the uninitiated to neglect this area.

Understanding cash flow isn’t just about knowing when cash is going to hit your account. It’s about planning for expenses, bills and downturns in income months or even years down the line.

Despite its importance to whether your business survives or not, cash flow management isn’t easy. It’s an acquired skill, and there’s no shame in admitting to yourself that you need support with cash flow for your start-up.

Luckily, an accountant can help you prepare a cash flow forecast for your new business, which will take into account inflows and outflows, as well as expenses and capital purchases and will help you stay afloat during those bumpy times every start-up founder inevitably encounters. 

Some accountants also offer ongoing cash flow management support via an app, which will give you a clear view of your cash flow and enable you to make informed decisions about your growing business. 

Start-up tax reliefs 

In the UK, start-ups can benefit from various schemes to help them get off the ground and grow. These include Enterprise Management Incentives (EMIs), which offers fixed-price shares as an incentive to staff, the Enterprise Investment Scheme (EIS), where investors to your start-up can claim up to 30% tax relief on their investment, and Social Investment Tax Relief (SITR). 

SITR includes a 30% deduction from the cost of their investment from their income tax liability, although it only applies to social enterprises – including charities or community-interest companies – to help them access finance.

Banks have funds to help promote innovation in certain sectors through an early investment, particularly technology and financial technology (aka ‘fintech’). These are incredibly competitive, and you’ll need a watertight business plan and an innovative concept which solves a market gap or existing problem. To find out more, check out your bank’s investment department.

Ultimately, having a good accountant by your side during those early stages is crucial for anyone with their own start-up. It will help you avoid falling victim to cash flow problems, bad budgeting and messy accounting, as well as giving you the best chance of raising the finance you need.