‘A successful man is one who can lay a foundation with the bricks others have thrown at him’
For entrepreneurs, starting a new business is no doubt the most exciting thing you can possibly do. This is certainly the case for me! Coming up with the concept, researching the market, creating the business model, designing the marketing and sales plan, thinking about the limitless potential and strategizing how you’ll achieve success. Oh man, just writing about this gets me all pumped up!
When building a business it’s so easy to get caught up with all the exciting elements and not even think about key fundamentals like the company and financial structure of the business. For most of us just the words structure and financials sends up to sleep, yawn!
Boring as they may be these elements are absolutely essential if you want to avoid a huge amount of pain down the track!
Take it from a guy (me) who didn’t structure his business properly and paid the price for years to come, big time. For those who have built a business without the right structure in place you are probably nodding your head right now knowing exactly what I‘m talking about. PAIN!!!
Lesson learned, whilst I still don’t find structuring businesses that exciting I can see the value in it and make sure I do it from the get go to avoid the pain that comes if I don’t.
Below are the key steps I use to structure a new business;
Get Professional Advice
Every entrepreneur needs a lawyer and accountant, period. If you’re a first time business builder you probably don’t have either of these, and if you do have an accountant and lawyer they probably are not the right type. If you’ve come from being an employee you have likely used an accountant to do your yearly tax return, but that’s about it. Similarly, unless you have been in trouble with the law or purchased a property you are unlikely to even have a lawyer.
The type of lawyer and accountant you need are professionals who specialise, and have a lot of experience in, early stage and mature businesses. This way they can support you in your journey from start-up right through the growth and exit phases. I choose firms who are large enough to have the expertise I need but not so big that they charge a fortune and I can’t deal directly with one of the partners.
So how do you find these people? Whenever I’m looking for any service I always turn to my network first asking them for recommendations. A word of caution, make sure you are asking other entrepreneurs and business owners otherwise you’ll get the recommendations that are not suitable. If you don’t know anyone suitable within your network, the next option is to join a business network group like www.bni.com or your local chamber of commerce. In these groups you’ll find people who can point you in the right direction.
Once you have a couple of good recommendations arrange a face to face meeting with the firm and tell them your vision for the business. If they are excited about and understand your vision, and you feel you could work with them then they could be a great choice. Since I don’t know enough about the specifics of their work I use my intuition when choosing a firm – it rarely lets me down.
Before locking a firm in be clear on their rates and when you will be charged as accounting and legal fees can grow very very quickly – which can really affect your businesses. After being burned a few times, I have set rates with my accountant for reoccurring tasks like quarterly financials and reporting. For one-off tasks my lawyer and accountant know that if they have not provided a quote which I have signed off on, I will not pay the bill. I also insist on monthly invoicing to avoid large bills that can be a huge surprise and really hurt your cash flow.
The next step is to engage a lawyer and accountant and work out the steps to set up your business. Because the lines between accounting and legal can cross from time to time I like to get my lawyer and accountant together from time to time to agree on the approach. The very first meeting is a good time to do this because if they don’t see eye to eye in the first meeting chances are the relationship won’t be much fun, and at your expense.
Get the Right Structure
Your lawyer and accountant will help you set up the structure of your business. I can’t stress enough how important this is. When I set up Elevate I did not get professional advice. I simply walked into my government agency, filled out a form, paid about $400 and my company was set up. I didn’t consider things like the number of shares the company would have, what type of company it would be (there are many types depending on what country you’re in) and how could I protect my personal assets. As a result this has caused all sorts of problems and a crazy amount of time and cost to sort out as the business grew.
Issues like this can be such a distraction. In a new business you need to be focussed on lead generation and sales, not structural issues. These problems can be so painful they can make you want to throw in the towel. I know I wanted to sometimes. Don’t miss this step when setting up your business.
Separate Personal from Business Income and Expenses
Using my own experience once again (oh yeah, I’ve made a ton of mistakes), I really learnt a tough lesson when I didn’t separate personal from business income and expenses from the outset.
I was so busy getting the money together that I needed to set up the business, as well as trying to survive over the first 6 months that I didn’t manage income and expenses very well at all. While I had a company bank account set up we were not making any money, however I still had many expenses from staff to rent to marketing to suppliers – the list goes on and on.
To survive I would pay for things on personal and business credit cards and well as personal and business accounts, whichever had funds available. Then I would juggle money from credit card to account and account to credit card without any clear trail of what I had done. It was an absolute mess!
When it came to do the end of year financials I engaged an accountant, which was way too late in the process, to sort it out. The mess I’d made was impossible to sort out and I ended up paying more tax than I should have. Not to mention the huge amount of time and additional accounting costs!
So how do you avoid this type of mess?
As soon as you decide to set-up a business, take the following steps;
1. Engage a lawyer and accountant.
2. Agree on the company structure.
3. Register the business name.
4. Set up three bank accounts (Income, Tax, Savings) in the business/entity name.
5. Deposit a starting balance into your account. The amount will depend on the type of business you have.
6. Get a company debit or credit card. I prefer debit with a new business to avoid using credit – it’s too easy to get into financial trouble.
7. Link accounting software like Xero , Quickbooks or MYOB to your bank accounts and have your accountant set up and show you how to use it.
Once you have followed these steps you are then ready to operate your business. And remember to only use your company accounts for company income and expenses!
If you are setting up a business right now and have already started incurring expenses without having completed the above steps this is what you should do;
1. Download your bank statements from the start of the financial year and highlight any expenses you incurred for your business.
2. Find the invoices and receipts for all the expenses you incurred. These could be hard copy or sitting in your email somewhere. Save these in a digital file for month and year (eg. March, 2014). I suggest a shared service like Dropbox so your book keeper and accountant can easily access the files.
3. Set up the company accounts.
4. From your company accounts pay yourself back the exact amount for each expense noting what the expense is in the banking transaction.
5. From here on use only your company accounts for company expenses and income.
These steps will create the paper trial you need so when end of financial year comes your accounts will be straight forward and at a reasonable cost.
Following these steps will take a bit of time and require you to invest a few dollars. However I promise you that the time and investment will be worth it, remember its about avoiding PAIN later, and once you have structured your company properly you will be able to focus on building your business knowing that you’ve set things up right.