When setting up a new business it is important to get professional advice from an accountant and lawyer to ensure that there will be no unexpected problems later in the life of the business.
It is important to first decide what kind of entity to trade under. Examples of this are sole trader, where the owner trades as an individual; a partnership formed by two or more people; a company where limited liability will be available if the directors’ responsibilities are met; and a Trust where income can be distributed to beneficiaries or left as trustees’ income.
Once that has been decided, a business plan should be put together outlining what the business will be doing, its structure, the capital or finance needed to meet the business requirements and projections on how the business will trade in its first year and the following years. This should be discussed with an accountant who will review the plan and make suggestions to improve it if necessary. Accountants look at things such as the terms of lease, viability of the plan and the financial needs of the business. Always allow finance for working capital, which is money to cover the initial months of the business, as there may not be an income in that period.
The business plan, once finalised, will then be required by any financial institution that the business owner may hope to borrow from. The institution may also ask for a cashflow projection to show that the business can make a profit to cover the servicing of the debt – this may be required to project cashflow for a period of up to three years. The cashflow projection and supporting schedules can also be used as budgets to compare to actual trading once the business starts, so that the business owners can see whether everything is going to plan. Accountants have cashflow models available and it is recommended to get an accountant to prepare the cashflow projection, if it is required for financial purposes.
A good accounting programme will also be required as it gives business owners a day-to-day snapshot of the business, which ensures if there are any problems they can be identified quickly.
I would recommend Xero, which is a cloud-based product that allows an accountant to help from their office – the client and accountant can both review Xero at the same time using internet logins.
If a partnership is being considered, it is a good idea to establish the dissolution processes at the beginning and document these. A lot of partnerships are set up with friends and therefore most people never expect that there will be problems. However, if it gets to a stage where the partners can no longer work together (and this does happen) without a dissolution process in place, it could mean the business may have to close down, losing all the hard work and effort that the partners have put into it.