How to start a business

You have a concept or business idea. You’ve tested it out using some form of market research. You know you have a prospective audience for your product or service. You’re working to solve a genuine problem by providing a viable solution.

Whilst success may not be guaranteed, you see plenty of potential for growth. It’s official, you have a potential enterprise. The question now is, how to start a business and run it successfully?

Unfortunately, setting up a business is anything but easy to implement. Managing the finances while dealing with varying emotions can be very challenging. You'll probably experience vast highs along with considerable lows.

You'll spend a substantial amount of time, effort and investment just to achieve profitability. So much of your organisation's destiny will be reliant on you. In the early days it can bring plenty of stress.

Always remember when starting out, this is about the long term. Small businesses require a constant combination of ambition and perseverance to see things through. Thankfully, there is plenty of help available to relieve some of the burden and support you every step of the way. It's time to start trading!

1. The problems entrepreneurs face when starting a business

Working on a start-up can produce a real mix of feelings. Identifying these is key to helping you emotionally manage the task of how to build a profitable business when starting from scratch. It's something we love supporting, the feelings of excitement and visions of endless possibilities.

Unfortunately running a start-up can also cause much stress. There's so much to consider for entrepreneurs. You may feel you lack knowledge in key areas. How then can you make commercially sound decisions? That's why it's important to recognise the skills you bring to the table. Consider carefully what exactly your role will be in the business.

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It's impossible to do everything. Many entrepreneurs spend the early days focused on product/service development, and sales and marketing, to generate income. You should always seek help in the areas you're less experienced in. That means building a network of support and considering the help of a mentor.

2. What are the business life cycle stages?

In over 75 years of advising organisations, we've seen most of the challenges entrepreneurs face. Many start-ups from day 1 will require a full range of accounting, tax and advisory services. This helps them develop a scalable business model to progress into a successful growth story. 

A useful place to start is by considering where you are in the business life cycle? Use the diagram below, known as the Stages Model (a concept originally developed by Shirlaws) to plot your current position.

 
The stages model courtesy of Shirlaws

 

All organisations go through these stages of the business life cycle. Entrepreneurs often experience these emotions. By understanding which stage you’re at, you’ll be better equipped to deal with the emotional demands of running your own business.

 

The "start-up" phase is where your focus is likely to be. This is a frantic period. Launching a new product or service means feelings can vary considerably. There will be considerable excitement as to future prospects. This is mixed with anxiety as to the time, money and effort required to build the business.

 

Soon after launching, you'll hit a "brick wall". Your start-up will need an injection of finance to progress further forward.

3. Understand the different types of business structures

One of the first key tasks you’ll need to tackle is which business structure to trade from. Your decision will come down to what is most appropriate to your needs. You’ll need to understand what are the different types of business structures along with their various pros and cons.

Should you set up as a limited company, partnership, or limited liability partnership? This can be a complicated matter.  There are implications in terms of exposure to taxation, reporting requirements and the degree of personal liability. It would be wise to seek professional help early on. You need to understand and be comfortable with how much personal responsibility you may be undertaking. Think, losses or debts the business is exposed to.

Starting out with the wrong structure can create all sorts of complications. Further down the business journey this could cost you considerably more money. Better to get it right in the first place by seeking advice, than having to fix it.

4. Bookkeeping services – the sales ledger and the purchase ledger

Having picked a suitable structure, you’ll now be in a position to start trading. Your business will soon start making sales. When it does, you’ll need a system in place to log the transactions. This means you'll need to set up the sales ledger and the purchase ledger. This records money received along with what is still owed. It also details what you have paid for and what you remain liable for.

It might sound mundane but this is an absolutely vital part of financial management of your start-up. A system needs to be put together and implemented through bookkeeping. You can then understand and monitor the performance of your business via your management accounts. Without bookkeeping it would be impossible to construct your annual accounts, or accurately calculate your tax liability.

Ignore this vital task at your peril. Without it you won't understand how well you're doing. You'll also struggle to access any finance and face potential fines from the taxman.

5. Cash flow and the working capital formula

Sales coming in is an indicator of success. You may even become profitable quite quickly. However, cash flow is the acid test as to the financial health of your start-up. It's vital to understand your working capital. That's the money you have coming in versus the cash going out. You need to know your cash position today. Then, project what your cash flow will look like in 6 months time.
 
Business lifecycle & cashflow
 
 
Forecasting will help you plan for important purchases and investment decisions. To understand how financially secure your start-up is, use the working capital formula. It allows you to understand how many times the business can pay off its creditors in the next 12 months, using cash and any other assets that can be converted into money within a year.

6. When you'll need start-up funding

Entrepreneurs have to perform many balancing acts. One is how to manage everyday tasks while maintaining a positive cash flow. It's the key to early stage survival. When you start out you will have to invest a lot of money to launch your idea. You'll need to bring it to market and establish your operations.

Few entrepreneurs have the necessary funds on hand to do that. Quite early on you'll need to start planning how you'll raise the finance to launch your start-up. Alternatively, you might have begun trading on a tight budget. You may now need funding to progress the business by purchasing:

  • Stock
  • New equipment
  • A new premises or office space
  • Resource in the form of employees

To obtain start-up funding, first you must map out what you need the finance for. You should detail how this money will help the business develop and grow. You'll need to produce forecasts for sales, cash flow and profits.


This will provide a potential source of finance, such as the bank or an angel investor, with an understanding of how the funds will be used. It will show them what the finance will do for the business. Sources of finance could include investors who will look for a form of equity or, a bank in the form of a bank loan. Check carefully for which option suits you best.

 

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7. The purpose of a business plan, to help secure finance

What is the purpose of a business plan? There are many compelling answers to that question. Your cash flow and profit projections will need to be detailed in this document. This will be for any potential provider of finance to scrutinise. The business plan will form the basis upon which they understand:

  • What the money is being used for
  • What it will do to help develop the business
  • How you will service any debt you may take on

How to write a business plan? It is admittedly no easy task. You should seek the help of your accountant or advisor to do this. They will apply their experience of helping other entrepreneurs to:

  • Test your assumptions
  • Think through your ideas
  • Chart the numbers around your business model

Refer to this document regularly and reference your projections. Good forecasting and planning are key to understanding future income and expenditure.

 

Doing this will help ensure your start-up doesn't suffer a shortage of cash. Unmanaged payment of suppliers or employees can be fatal. It can force a good business to close.

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8. When and why do I need an accountant for my start-up?

A common question we hear from entrepreneurs is, "why do I need an accountant?" Managing the finances of your start-up is not an easy task. The previous sections on this page will have demonstrated that. Only undertake it if it's a skill of yours and something you want to do. Otherwise it could take up valuable amounts of your time. This could also distract from other vital business areas.

Developing your concept, building your network, servicing customers, building your brand and making sales will likely be higher up your priority list. This will allows little time for processing things like allowable business expenses.

Unfortunately ignoring the finances by not putting a system in is not an option. You need statements for income, cash and profits once sales commence. This is a vital to accessing finance and calculating your tax liability. Fail to do the later and you'll probably face hefty tax bill.

Wellers R&D Infographic Page

The likelihood is you'll need an accountancy firm from the start. A good advisor will keep you compliant with all filing, legal, tax and regulatory requirements. This will save you potentially significant time and money. A good firm will provide you with:

  • Insight, from their experience of guiding other start-ups 
  • Analysis of your business finances, how well you're doing and what can be achieved through your financial position

Find an advisor that shares the same passion for your business as you do. Check they have a great track record of client service delivery. Ultimately, your accountant is an investment and an essential member of your team. Their work can help you create a successful business from scratch. 

Managing the emotions of setting up and running a start-up, Wellers' free guide

Please note that the names and characters used in the examples mentioned above are hypothetical. Please also be aware that information provided on this page is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this website.

Testimonial

Thanks very much to Wellers for your hard work and efforts in supporting the business. You've shown a great level of support and pro-activity, and we've really appreciated your practical advice in getting the business off the ground.

Nicholas Walters, Founder & CEO of Hopster