Introduction to Business Finance
Most successful business owners will tell you that ‘cash is king' and to ensure you have a cushion/contingency of cash in your bank account. Without cash you cannot make your products or provide your service and therefore have no business. But how to you decide how much to charge for your product or service and once you are hopefully making sales, how do you keep a track of the money you have?
Finance Jargon Buster
Book-keeping: weekly or monthly record-keeping of money that comes in and goes out of the business
Business Expenses
Money spent on business activities during an accounting period (usually 1 year from the date you start trading and can be aligned to the tax year)
Cash Flow
Predicted cash flow shows a forecast of the money that will come in and go out of the business. Actual cash flow is a record of what money actually comes in and out of the business over a period
Direct Costs
Costs that can be traced directly to the production of a specific unit of your product eg materials used, production labour, certain production expenses. Also known as variable costs
Gross Profit Margin
The difference between sales and the cost of goods or services sold. Also known as gross margin
Gross Profit
Total income/revenue from a business's sales minus the direct costs of making the sales (this does not include a business's overheads or running costs)
Indirect Costs
Costs that cannot be traced directly to the production of a unit of your product eg property costs, administration and selling costs. Also known as fixed costs, running costs or overheads
Net Profit
A business's total income minus its total costs
Profit
The figure representing the amount by which sales are more than expenses
Revenue
The total sales income of the organisation for a period, regardless of whether or not the customer has paid. Also known as sales revenue or turnover
Managing Your Personal Finances
When thinking about starting a business it is really important to spend time getting to know yourself better so that you can consider whether self-employment might be right for you.
Understanding your attitude and behaviour towards personal finance and money management will help you in this process because it is a skill central to being self-employed and to life in general.
Attitude to Cash Quiz
To help you to think about what type of spender you are, you can answer the attitude to cash quiz by clicking here.
Having completed the quiz and worked out broadly what type of spender you are, it is worth thinking about the following questions
• What are the advantages of being your type of spender?
• What are the disadvantages of being your type of spender?
• What changes would you like to make to your spending habits?
• How would these changes help you to reach your goals?
Points to Remember
People's attitude to money changes and this activity isn't necessarily an indicator of whether or not you would be good at running a business. It will help you to think about how you might be with your business money and highlight areas where you could make changes to be better at managing your money.
Understanding Your Credit Scores
If you're thinking about setting up a business, it's important to consider your personal money situation and credit scores. It could impact on what opportunities are available to you.
Debt is money owed to someone else, for example, mobile phone bills, store cards, credit cards, catalogues or family loans.
The majority of people are living with some form of debt, and it is often a normal part of someone's day to day life. Debt is not necessarily the issue - it's how we manage our debt that is important.
Understanding and addressing the debt you have is the first step to being in control of your money and the debts that are ignored can make it more difficult for you to borrow money in future for something as small as buying a contract mobile phone to something as big as taking out a loan to start your business.
Key Questions
What is a credit score?
A credit score estimates how likely someone is to handle financial commitments responsibly. There is no universal system; each credit agency has their own. As a general rule high numbers are good and low numbers are bad.
Who checks my credit file and credit score?
Any organisation that lends you money or needs frequent payments might check your credit file and score. For example, contract mobile phones, credit cards, store cards, catalogues, mortgage lenders, car insurance and banks.
Why do organisations use credit scores?
Organisations used to analyse credit files manually. Decisions were based on personal opinion and were often affected by factors that had little bearing on an applicant's ability to manage money. Credit scores help organisations to assess risk fairly because they are consistent and objective.
Who are the main credit reference agencies?
There are three UK credit agencies in the UK: Equifax, Experion and Callcredit. All use similar information to calculate credit scores even though their rating scales are different. Organisations use their preferred agency, some use more than one. The Prince's Trust uses Equifax.
Business Planning
We know you've got a great business idea in you, but it's so important to put good plans in place before you get going. It can be hard to know where to start with writing a business plan, and payment methods, finance and insurance can be a headache, but that's where we can step in.
Business Plan Templates
A business plan gives an outline of your business, the market in which it will operate, and how it aims to make money. Your business plan should allow you to answer this question: why will your business succeed when so many others fail?
What Payment Options Are Available?
Before starting your business, it is important to consider how you will allow your customers to pay you for your products or service.
It is important to think carefully about the payment options available to you and make sure that the options you choose are practical for your business.
Choosing Your Legal Structure
Before you start trading, you will need to decide on a legal structure for your business.
The legal structure that you choose will have an impact on the way that you do business, for example, the amount of tax you pay on your business activities. It is a good idea to get advice before making a decision.
The three most common legal structures for businesses are:
Sole Trader
This is where you are the sole owner of your business
Partnership
This is where two or more people want to set up a business together
Limited Company
This is where the business is registered as a separate legal entity from the people who own the business
Where to Get More Information
Companies House
All limited companies trading in the UK must be registered at Companies House
HMRC
HMRC can provide advice on paying tax under different legal structures and altering the structure of your business.
Social Enterprise Coalition
Provides advice on legal structures, grant funding and policy for social enterprises.
Charity Commission
Regulates the administration and affairs of registered charities and offers guidance on policies.
CIC Regulator
Information on community interest companies.
Insurance for Business Start Ups
All businesses need insurance as soon as they start trading.
Some types of insurance are required by law and should be in place before you are up and running, for example, you must have employers liability insurance if you employ people. Other types are optional but worth considering, as uninsured losses could put your out of business or leave you in debt.
The broker or insurance company you use should be registered with the Financial Services Authority - you can call 0845 606 1234 or visit www.fsa.gov.uk to find an authorised insurer.
Making Your Business Greener
There are many benefits to running a green, eco-friendly business; good news for you and your bottom line, good news for your customers and their cash, and good news for the environment.
There are significant benefits to running a green business, and you also have a legal responsibility for the impact your business has on the environment. Running a green business can bring a lot of benefits. As a small business, being aware and reducing your environmental impact can help you to reduce your costs, run a more efficient business and appeal to a consumer market that is becoming more environmentally conscious.
You can take some steps to make your business greener when it's in the early stages of growth and some later on when you may be looking at taking on staff and expanding your range of products/services. Here are some steps that you might want to consider to make your business greener:
Reduce your carbon footprint
You can lower your energy and water use and reduce your waste to reduce your carbon footprint.
If you don't already measure the ‘size' of your carbon footprint, you can make a start by recording how much you travel and much you spend on utilities (gas, electric, water). You may be able to spot ways of reducing what resources you use or how often you travel.
Streamline your business activities
Building a network of support can help you to run a more efficient business.
Knowing where to go for help and how to build effective and links and partnerships with other businesses means that you waste less time and energy looking for answers instead of finding them. For example, your local council can provide information on funding available to help you make your business greener (e.g. by providing grants to help you update technology). Partnerships with businesses that provide complimentary or related products and services will also ensure that you provide a rounded and comprehensive service to your customers.
Spot new business opportunities
As the consumer market becomes more environmentally aware, customers start to demand new products and services and consequently new markets begin to emerge. You may want to take advantage of these developments and stock green products or provide ‘green' services. Customers also start to demand more of the businesses to which they give their money. They want to know what your business does to protect the environment and the community around it.
Be sustainable
Be conscious of how you can continue to run and grow your business while minimising the impact you have on the environment and community around you. Being sustainable means that you can reduce costs and any risks to your business by taking advantage of new technologies and developments to make your business greener. For example, if you run a sandwich bar, consider the impact that sourcing your products locally would have on the environment and community around you.
Involve your staff
Encourage your staff to understand your business values, to play an active role and to come up with ideas for how you can make your business greener.
Plan for change
Understand how changes to environmental policy can affect your business and plan for these changes. As government introduces new legislation or tax rises on prices, for example, you will need to revisit your business plan and think creatively about how you can adapt the way you do business. For example, if as a florist, you import a lot of your stock from abroad, you may want to consider sourcing your flowers closer to home or from a Fair-trade supplier.
Information provided by The Prince's Trust
