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FAQs

Q1. What accounting records do I need to keep?
A1.There is no one system which will apply to all businesses. You may find that you need to adjust yours with the benefit of experience, until you have developed one that fits what you want. If your business has only a few transactions, the system you introduce can be very simple.

A couple of simple accounts books may well be sufficient. You will need a cash book to record bank payments and receipts. The same book can also record your petty cash position. Every time you make a sale, you should produce a sales invoice or receipt. The invoices should be numbered and filed in numerical order. Each sales invoice should be recorded in your accounts book. If your business is simple, record purchases details in the same accounts book as your sales. You are required to keep separate VAT Accounts if you are registered for VAT. If the simple system described above is not sufficient for your business, there will be an increasing number of documents and records to keep, e.g. purchase orders, stock movements, time sheets, sales day book, purchase day book, wages records and a nominal account.

There are also a number of computerised accounting systems for sale - see our SAGE Dealership for details.

Q2. What type of business structure should I have?
A2. The main structures for trading in the UK are as a sole trader, a partnership or a limited company.

A sole trader is the simplest business structure. You can trade in your own name and manage yourself. The minimum administrative requirements apply. The profits from your trade will be taxed under Schedule D, Case I of the Taxes Act. As you trade in your own name, you have unlimited personal liability. This means that you are liable for any debts of the business and your personal assets could be used to pay business assets. Ultimately, your creditors could make you bankrupt. It may take time to build up good credit terms with your suppliers and your main source of external funding will be bank overdrafts and perhaps loans.

A partnership automatically arises where two or more people agree they will share responsibility and decision-making for a business. The law imposes a duty of utmost fairness and good faith in partners' dealings with each other. Partners are taxed in a similar way to sole traders, upon the taxable profits of the business, divided in accordance with the profit sharing arrangements of the partnership. Some of the largest legal bills arise from partnership disputes, often stemming from personality clashes overriding business sense. It is always prudent to instruct a solicitor to draw up a partnership deed for you.

A limited company is seen as a person in the eyes of the law, and is quite separate from the individuals concerned, even if they are the directors and shareholders of the company. The company can own property, execute contracts, commit crimes, and, crucially, it can owe money. This is the principal advantage of running a limited company - it has been accepted that the liability of shareholders is limited to the amount of capital unpaid on their shares. Generally, if a company goes into liquidation as a result of poor sales, the shareholders can simply walk away, taking anything that remains of the assets after preferential debtors and creditors have been paid in full.

A limited company is usually regarded as more credible and reliable than a sole trader or partnership, but you should bear in mind that anyone, and in particular, any creditor, is free to perform a company search to discover how much paid-up capital and assets the company has recorded with the Registrar of Companies. Companies can also issue 'floating charges' on their changing assets and successful companies can convert to public limited companies to offer shares to the public, or to float on a stock exchange where the general public can trade those shares.

Forming a company is relatively simple. The main difficulty with trading as a limited company is adhering to the detailed provisions of the Companies Act and case law. directors of a company are subject to Numerous duties to their company, and virtually all company matters will result in legal documentation, a good deal of which you will have to file at Companies House within strict timescales. Finally, for directors of many small companies, limited liability can be somewhat illusory. At least in the early years of trading, banks and suppliers will often demand personal guarantees from director-shareholders before advancing cash or supplying goods. If the company fails, the directors' assets are then just as vulnerable as those of the partner or sole trader.

Q3. When should I incorporate?
A3.Many businesses start off unincorporated and switch to companies when they have passed through the initial phase. The tax treatment of the transfer to corporate status is a relatively straightforward exercise for which specific tax reliefs are available. There can be a 'catch up' tax charge in the year of change but with planning the amount should be considerably less than the savings you will have achieved by trading initially on your own account.

Q4. What should I include in my business plan?
Q4.Nearly two in every three small businesses don't have a business plan. A plan is essential to decide right at the outset what is required to make your business a success. First, consider what is the underlying purposes of the business plan?

• providing management with direction
• providing management with focus
• determining available and required resources
• obtaining additional resources
• providing a benchmark against which future performance can be measured
• identifying parameters within which the business should be operated.

Turning now to the actual content and structure of a business plan:

• Introduction and Executive Summary
• The Business
• The Markets
• The Business Plan and Strategy
• Organisational Structure
• Financial Information
• Appendices

Having prepared your business plan, remember that it will need updating and amended on a regular basis to reflect the ever-changing circumstances of your business.

Q5. How do I calculate my breakeven position?
A5. Perhaps the most important single calculation in any costing exercise is to find the point at which real profits start to be made. the point where the sales revenue equals total costs is the break-even point (BEP). It is only after this point that a business can start to make profits. You can work this out by using the following formula:

BEP = Fixed Costs / (Unit selling Price - Variable Costs per Unit)

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