Considerations when starting a new business

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Last year proved that business owners that incorporate contingency financial planning to circumnavigate any event have the best chance of thriving in a business climate laden with uncertainty.

In our last blog, we learnt that starting a new business takes grit plus a few essential personality traits such as resilience and perseverance.

But you also need a sound business plan with an accompanying financial plan. This plan you set out is useful not only as a feasibility study of what it takes to be successful, but it will also serve as your playbook – or the way you intend to run your business. When you do this, the success that you intend does not stay elusive but becomes characterised by tangible goals.

As you may well know, determining the feasibility of your business is a calculated exercise on its own. It means that you have carefully considered the feasibility that the business can be successful. You have penned down financial projections and assumptions and you are sure that it is a realistic and achievable.

For this plan to run as smoothly as you can possibly, well…plan for in the long run, you will need to pay close attention to certain considerations:

  1. Legal form of the business

Choose the right legal form for your business from the outset to avoid administrative, financial, and legal difficulties further down on your growth trajectory. These legal forms include Sole Proprietors, Partnerships, Private Companies, Non-profit Companies and Personal Liability Companies.

The legal form can benefit or hamper the growth of your business, so be sure to reach out to your trusted advisors to consider the nature, size, ownership, running costs, security, and tax implications of each applicable to your business.

  1. Companies fiscal year

A company’s fiscal year is called its financial year. It is any 12-month period that the company reports on for accounting and income tax purposes. Depending on the legal form of the business, business owners can choose their fiscal year end.

Every business and/or industry has its own unique sales patterns and seasonal variations. Businesses may opt for a fiscal year end that follows the natural sales patterns of the business so that the whole sales cycle falls into one fiscal year. This will help a whole lot with forecasting and budgeting. You may also opt for the fiscal year to end in the quieter months where there are fewer stock movements and less sales spikes.  I mean… who wants to perform stock counts on New Year’s Eve!

  1. Shareholders

Often people start businesses together, due to the different skillsets and resources that they can bring to the party. These agreements are mostly done with a happy handshake under the assumption of a happily ever after ending.

Many times, these relationships start off well, but unfortunately doesn’t always stay that way.

To safeguard both parties within the agreement it is vital that shareholders of a company enter into a shareholders’ agreement at the start of the relationship to regulate shareholders’ rights and obligations and prevent disputes later on. For more information, head over to our article on all you need to know about shareholders’ agreements.

  1. Accounting and finance considerations

Don’t allow finance and accounting to take a backseat in your business. You certainly do not have to do it alone. Finance and accounting should not be a restrictive and limiting measure, but rather serve as the measuring tool to evaluate your business goals and performance.

The first step in setting up a new business is to have a clear view of the actual company performance. Adopting cloud-accounting software such as Xero will enable you to have a real-time view of just that. The comprehensive information at your fingertips will direct your business decisions to achieve your financial goal, becoming closer to the Blue Sky profit you hope to earn.

Don’t forget to review your finances on a monthly basis to ensure that you stay on track. Compare actuals so that you know exactly what happened. This will help you to improve and adjust your business decisions as new information comes to your attention. That way you will stay ahead of any unexpected and unwelcome surprises.

  1. What to register for?

Apart from registering your business as a Company with the Companies and Intellectual Property Commission (CIPC), should you choose that legal form for your business, there are also other registrations to keep in mind.  Once registered with CIPC, the South African Revenue Services (SARS) will automatically generate an Income Tax reference number. You only need to register for eFiling to transact electronically.

Businesses whose revenue exceeds R50 000 (or estimated to exceed that) in a 12 month cycle can voluntarily register with SARS for VAT. It is compulsory to register for VAT if revenue exceeds R1 million (or are estimated to) in a 12-month cycle.

Open a business bank account at any major commercial bank but be sure to do a comprehensive comparison of bank charges before making your final decision.

If you employ people (including yourself), the business must be registered for PAYE with SARS. In this case you would also need to register with the Unemployment Insurance Fund (UIF) and Compensation Fund. Your trusted business advisor (such as our Advisory team) can expertly assist you with these registrations!

  1. Financial needs

Other than your initial investment in the business, you will likely need access to funds to keep your business liquid. Monitoring of your cashflow is vital. Stay on top of cash flowing in and out so that you are prepared when you do need access to funds.

Prepare a short pitch, so that you can sell your business to that potential investor you met on your coffee run. Set aside funds for taxes, like VAT, PAYE and income taxes which will become due. Be disciplined and committed within your business’ long-term strategy and try building up cash reserves for the unforeseen (lessons well learnt in 2020). Also ensure that the assets in your business that generate income are protected and insured. You cannot afford to lose these assets.

These careful considerations when starting out your business, help you structure your business in a transparent manner.  Use these steps to identify pitfalls with added peace of mind, so that you count less sheep at night and instead execute sound business decisions.

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