Starting a small business: the money questions

Small business failure is more often a cash flow event than a profitability one, which means the financial structure matters as much as the idea.

The questions to answer first

Before spending anything.

What does it cost to start, including everything?

What does it cost to run monthly, including your own drawings?

How long before it covers its costs, realistically?

How will you fund the period before that?

What is the minimum you need to take out to live?

And what happens if it takes twice as long as projected, which it frequently does?

The structure decision

Which has ongoing consequences.

Sole trader or equivalent: simplest, cheapest, with unlimited personal liability for business debts.

Partnership: similar, with shared liability and a genuine need for a written agreement.

Limited company: separate legal entity, limited liability, more administration, different tax treatment and public filing requirements.

The right answer depends on liability exposure, income level, tax treatment in your jurisdiction, and whether you need to raise investment.

Changing later is possible and involves cost and complexity, which argues for taking advice at the outset.

Cash flow

Where businesses fail.

Profit and cash are different: a profitable business can fail if money leaves before it arrives.

The causes: customers paying late; stock purchased before it is sold; equipment bought outright; tax bills arriving after the money has been spent; and growth consuming cash as it expands.

The measures: invoicing immediately; clear payment terms and prompt chasing; deposits and staged payments; charging interest on late payment where permitted; keeping a cash buffer; and forecasting cash rather than only profit.

A simple monthly cash forecast, showing money in and out, is the single most useful management document for a small business.

Separating business and personal

From day one.

A separate business bank account, which makes the position visible and makes accounting straightforward.

A separate tax account, receiving a proportion of every payment.

Clear records of what is business and what is personal, since mixing them causes tax problems and obscures whether the business works.

And paying yourself a defined amount rather than taking money as it appears, which is how owners lose track of whether the business is viable.

Tax and compliance

The obligations.

Registration with the tax authority within required timeframes.

Filing and payment deadlines, which differ.

Sales tax registration thresholds, which have pricing and administration consequences.

Employer obligations if you take anyone on, including payroll, pension and insurance.

Company filing requirements where applicable.

Data protection obligations if handling customer data.

Licensing and regulatory requirements for the specific activity.

And record retention requirements, which are longer for businesses.

Insurance

What is generally needed.

Public liability, which many clients and premises require.

Professional indemnity for advisory and professional services, which some professions mandate.

Employers' liability, which is a legal requirement in many jurisdictions once you employ anyone.

Equipment and stock cover.

Business interruption.

Vehicle cover for business use.

And cyber cover where you hold customer data.

Under-insurance is common and is discovered at the point of claim.

Funding

The options and their costs.

Own savings, which is the cheapest and concentrates the risk.

Business loans and start-up loan schemes, which exist in many countries with support attached.

Grants, which exist for specific sectors, locations and demographics and are under-applied for.

Credit union and community lenders.

Investment, which involves giving up ownership and control.

And, to be avoided where possible, personal credit cards and high-cost lending, which is how many small businesses end up with the owner personally in difficulty.

Personal guarantees on business borrowing remove the protection of a company structure, which is worth understanding before signing.

Knowing whether it works

The numbers to watch.

Gross margin per unit or per job, which tells you whether the pricing works.

Break-even point: the revenue needed to cover fixed costs.

Cash position and forecast.

Debtor days: how long customers take to pay.

And your own effective hourly rate, which is frequently the figure that reveals a business is not working even when it appears to be busy.

When to stop

A decision worth defining in advance.

Set a point — a date, a level of personal funds, a revenue threshold — at which you will reassess.

Sunk costs are not a reason to continue.

Closing while solvent is considerably better than continuing until there is nothing left, and is a legitimate outcome rather than a failure.

And free business advice services exist in most countries and are worth using before rather than after difficulty.

General information only, not financial, tax or legal advice. Rules vary enormously by country — consult a qualified accountant before starting.