The first year of business is an exciting time, but it is also an incredibly busy time. And it is difficult, a fact that is borne out by the high rates of new business failures. How do you make sure you don’t become one of those statistics? There are many things that you can do to help make your business a success in its early years, including doing accurate research, making your marketing effective, and maintaining high standards of service. But at the top of the list is money and financial considerations. Getting them wrong can be costly both in terms of actual cash, and in terms of time.
Your company structure will determine how your business is administered, and is largely dependent on your revenues. You have two main options:
- Sole trader or partnerships
- Company entity (normally a limited company) registered with the Companies Registration Office (CRO)
Sole trader or partnerships are the structure of choice for smaller businesses. You don’t have to register with the CRO, and the requirements for submitting annual returns and paying taxes are generally easier. Overall, it is a simpler structure.
But as a business grows, so do the liabilities. This makes a limited company safer when you start bringing in higher revenues, but there are additional requirements, and the costs of administering such companies are higher. These are usually outweighed by the limiting of liabilities, though.
New rules are coming into force in June 2015 regarding the structure of companies in Ireland with the introduction of the new Companies Act. Our blog post about the new act describes the changes <link to companies act blog post>.
You will have to register your business with the Revenue Commissioners and, in the case of a limited company, with the CRO. This should be done as early as possible.
You will also have to pay PRSI for yourself and anybody that works for you, according to the following criteria:
- Employees over the age of 16 who earn more than €38 per week
- Self employed (including yourself) if you earn more than €5,000 a year
One of the biggest financial difficulties that new businesses face in their first year of trading is cash flow. Here are a few tips to help you manage your cash flow well:
- Understand the difference between profits and cash flow – profitable businesses can run into difficulties because of issues with cash flow
- Make sure you have a strong credit policy and good debt collection procedures in place from the start
- Plan ahead with a cash flow forecast that should take into account large expenses and lean revenue periods
- Ensure you have enough startup capital to meet your cash flow projections
Finally, operate extremely tight controls on your cash. This means knowing exactly what you have, what is coming in, when it is coming in, and when it is going out.
It is important to get your pricing right at the start too. This will ensure you have enough money to deliver for your customers, while at the same time giving them a cost that is within their budgets.
If you price too highly you will not get as many customers as you hope, but pricing too low is equally as damaging. Your profits will be less which usually results in you spreading your resources too thinly to meet demand. This causes quality standards to dip, and creates a situation that is very difficult to recover from.
In order to set your prices correctly make sure you research your market, including your potential customers and your competition. Do accurate and realistic forecasting, and make sure you take into account profit margins and cash flow.
The final tip to managing your money and financial responsibilities during your first year of business is to ensure you have the right support structures in place. There are a number of elements to this:
- Good accountancy software
- Support from government-funded bodies, if available
- Professional support through an accountant or tax advisor
Having the right support in place often means the difference between making bad decisions in the whirlwind of work that is the first year of business, and making good decisions based on objectivity and reality.