According to the Office for National Statistics, just 41.4% of UK businesses survive after five years (Statistical bulletin: Business demography, UK, 2015). There are many reasons why companies fail, from running out of cash to inappropriate partnerships.
Entrepreneurs know that there are many factors contributing to the success of a business, from having a secured financial foundation to exceeding market expectations.
Whether you are a developer working on the next photo app, a solicitor championing the rights of individuals or a hipster opening a new café in the heart of London, chances are you will learn something new almost every day about your business, especially in the early stage.
At TaxAgility, our small business accountants have years of experience working with entrepreneurs across London, helping them to launch and grow their business with our extensive financial knowledge. It is through this process that we see our clients encountering common pitfalls that most start-ups face, so in this article, we aim to discuss the top 10 things you should avoid when starting a business.
The 10 common start-up pitfalls
1. Failing to choose the right legal structure for your business
Before you start trading, take a moment to select and implement the right legal structure for your business. This decision can determine the success of your business and should be made with the assistance and guidance of a professional advisor like our Accountants here at TaxAgility or someone with equal qualifications.
The reason is obvious: if you have set-up as a sole trader and the business has experienced some difficulties, creditors can come after you directly and take your personal assets. This is because as a sole trader, you have unlimited liability for business debts, given that there is no legal distinction between private and business assets.
Another thing to consider is that not all legal structures are taxed the same. Limited companies are widely considered to be more tax-efficient in comparison to sole trading and partnerships. This is because a limited company has a lower tax rate than personal tax. The corporate tax rate is 19% for tax year 2019/20 and 17% for tax year 2020/21. In comparison, the personal tax is 20% for basic rate and it quickly goes up to 40% and 45% depending on how much you earn.
As a director of a limited company, you can also draw a low salary and choose to use dividends to form part of your income, because dividends have a lower tax than salaries and they aren’t subject to National Insurance contributions, meaning your tax obligation is reduced.
2. Ignoring flat rate VAT
Flat rate VAT is welcomed by many start-ups who have an annual turnover of less than £150,000 in the first year because it simplifies your VAT accounting process and with less work on bookkeeping, you can concentrate on growth.
Essentially, this scheme allows you to pay a fixed VAT rate to HMRC and you keep the difference between what you charge your customers versus the VAT you pay to HMRC. You can’t claim VAT on purchases, however, except for selected capital assets over £2,000. To find out more about how this scheme works, you can read our article ‘Understanding the VAT Flat Rate Scheme‘.
3. Failing to take advantage of tax incentives/relief such as the Annual Investment Allowance
The Annual Investment Allowance (AIA) is a form of tax relief for UK businesses, and it allows you to deduct the full value of a piece of qualifying business equipment from your profits before tax.
It is possible to claim AIA on most machinery (see this Gov.uk page for the complete list). The AIA amount has been temporarily increased to £1 million between 1 January 2019 and 31 December 2020. The aim is to help small businesses get a footing in the business world. If you would like to know more about AIA, follow this link to “Annual Investment Allowance explained: Tax relief for small businesses”.
4. Failing to factor in all costs
You may have heard of stories from entrepreneurs who hastily left a permanent role to launch a business, only to realise that they cannot sustain the operation. In the UK, it is said that most start-ups spend over £22,000 in their first year on costs to get started – this amount excludes costs that are associated with business-specific activities like marketing and fulfilment. Because costs have a direct impact on company profitability, business owners must find ways to control them.
If you would like to understand different types of cost and learn the seven useful tips that can help you to manage costs, this article “Small Business: managing rising costs” makes a good read.
5. Failing to keep on top of cash flow
The moment you start to trade, the flow of cash coming in and going out of your business becomes a natural cycle that keeps your company going. Cash flow is an indication of your company’s health, and the beauty of it is that you can plan in advance to ensure that you always have cash in hand to meet any financial obligations. This plan, widely known as cash flow forecast, looks at projected expenses and income for the next 12 months and can include various ‘what-if’ scenarios.
In this article “Five ways to improve your company’s cash flow”, we explain what cash flow is and share five useful tips that business owners can use to manage cash flow. Follow the link to have a read, especially if cash flow is keeping you awake at night.
6. Failing to use the full potential of employees
In this day and age, both new start-ups and established small companies need employees who can adapt to the ever-changing market needs and are willing to take initiatives to see things through. The problem is not many employees possess that quality. At the same time, most start-ups and business owners do not have the time to review every employee constantly, leading to a greater disparity between company goals and those who are supposed to work toward achieving the goals.
Three common ways which you can use to help employees stepping-up to the challenge are:
- Developing their decision-making abilities
- Creating a supportive work culture
- Training
Having said that, we are also realistic and must point out that not every employee can reach his or her full potential in this particular point of their career journey. If the weaker employees are causing stronger employees issues and if you are not doing something about it, chances are, the stronger employees will leave. So keep a watchful eye and make sure that your strong employees are supported and can continue to contribute positively.
7. Being wasteful
Most start-up owners would like to think that their operation is optimised, but in reality, waste and inefficiency are common in every business.
If you have bought a fleet of new vans ready to deliver goods or have splurged £200,000 on an e-Commerce site with all the latest bells and whistles before making a sale, then it is time to examine what the business can afford and create realistic growth targets.
8. Failing to outsource when the need arises
Outsourcing is one of the best ways to achieve higher efficiency without a significant commitment. Most small business owners outsource the IT and accounting functions as soon as they start trading, allowing the business to utilise experts in these areas without having to hire full-time staff.
At TaxAgility, we help entrepreneurs across London with accounting and tax-related services, so you can concentrate on running and growing your company. The areas we cover include accounting and bookkeeping, payroll, tax planning, VAT, and management consultancy. We provide these services without any hidden costs and in most instances, you only pay an affordable monthly fee.
9. Failing to network
“Opportunity knocks through relationship building.” A client told us this phrase and we love it. Networking, at its core, is not about making a temporary connection for the sake of making a sale. Instead, the focus is on building relationships. In London, there are thousands of networking groups which readily welcome new members. Start by visiting a few and seeing which one is best suitable for you. Additionally, attend trade shows and conferences to make new contacts.
Networking can be extended to online too. LinkedIn is ideal for entrepreneurs who want to create more connections. For more about networking, take a look at this article “How to grow your business: Networking”.
Bear in mind that reciprocity is key in networking. When you make a new contact, there is a potential for you to reach out to all the friends and business associates that the individual has made. Equally, you must be prepared to introduce your contacts to the individual too.
10. Not having a business mentor
Building a business from scratch is no easy task, and many entrepreneurs stay so focus that they develop tunnel vision. At this point, having a business mentor available to discuss various issues with you is highly beneficial. This mentor can be anyone who has years of experience running various companies – it could be a serial entrepreneur, a professional business coach, a turnaround specialist, or even a chartered accountant like us. This mentor should provide independent and objective advice, even though the advice may not be something that you would like to hear.
Areas that you may consider getting advice also vary and may include:
- How to take your business to the next step?
- What can you do to improve productivity and skills?
- How to access additional funding?
- What should you consider when developing a new product?
- How to expand your business overseas?
TaxAgility’s accountants for small businesses
Launching a business is taking a big step toward realising your dream. At TaxAgility, we can support you and your business in many ways that can facilitate the process of building your business.
From establishing a limited liability company, preparing your accounts, answering tax planning questions, sorting out payrolls to controlling costs, our team of expert small business accountants is with you every step along the way.
We believe that your success is also our success, which is why we take the time to understand your business first. And with us working beside you, you can focus on other elements of your business endeavour. Contact us today on 020 8108 0090 or get in touch via our Contact Page.
This article was updated on 02/10/19.
If you liked this post, you might also enjoy:
- The complete guide to business funding
- Small Business: 5 ways to get new customers
- Five ways to improve your company’s cash flow
This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.