Accounting for your social enterprise start up
You’ve thought of the service or product you want to launch and know what the resulting social impact is going to be. Now you need to do your sums.
Keeping accounts for your business is essential to see if your idea is going to work financially. Many start ups wont turn a profit until year two or even three, so spending more than what comes in is, in many situations, inevitable. What is important is to be strategic – know what the deficit is and how you will plug it. Your social enterprise has a much better chance of being sustainable in the long term if you’re diligent with your finances from the beginning.
What do I need to think about?
If you’ve registered as a limited company in the UK, you must file annual accounts with Companies House, the government’s registry of businesses in the UK. If you’ve set up your social enterprise as a company, you’ll also need to file a tax return with HMRC, to find out how much, if any, corporation tax you are liable for. This is a tax on your annual profits.
If you’re intent on filing your tax returns yourself, allow plenty of time. The forms tend to be long winded and can feel intimidating, but the UK government website will help to hold your hand through the process. The taxman can also ask to see your accounts and supporting documents at any time, so you need to keep up to date the past seven years of your business operations.
Depending on the type of services or products you’re offering, and if the turnover of the company exceeds £85,000, you could be required to register for Value Added Tax (VAT). In this case, you’ll need to submit quarterly VAT returns to HMRC and pay any VAT due. Making Tax Digital is the Governments current initiative to ensure all businesses file VAT returns in real time. If this applies to you, you will need to ensure your record keeping is compatible with online filing. Find out if you have to pay it on the HMRC website.
If you’ve set up as a sole trader, you’ll initially need to register for self-assessment with HMRC. If this is your chosen legal structure then it’s still important to set up a separate business bank account – this is to avoid personal and business spend getting mixed up. Any tax payable will be due when the self-assessment deadline comes around.
Want more support to start up? Discover our Lloyds Bank & Bank of Scotland Social Entrepreneurs Start Up Programme 2019/20.
How should I record information?
The days when sober looking accounts clerks would file entries in multiple lined ledgers are long gone. As with so much of life in general, your records will be electronic.
If you’re computer literate, you’ll likely be familiar with Microsoft Excel, which means you’ll know what a spreadsheet is. If you’ve never maintained business accounts before, take a look at this template provided free by the Start Up Loans company. The spreadsheet tab called Cash Flow Forecast shows how to do some financial forecasting and another tab will guide you how to use it. This will help you consider costs you might have forgotten – insurance, for example. It also comes with a Personal Survival Budget tab, which will help you work out what kind of salary you need to pay yourself to live on.
You don’t need to splash out on Microsoft Office if you don’t already have it. If you have an online Outlook (aka Hotmail) email account, a version of Excel comes free in the cloud based OneDrive account (it’s there in the nine dots in the top left hand corner of your email browser). GoogIe does the same thing via the Google Suite, accessible in the same way.
Lots of online accounting services are available for a monthly fee, depending what your business will do. Some of them generate invoices, process credit card payments or produce tax returns. Most offer smartphone apps in case you need your numbers in a hurry. Quickbooks, Zoho and Xero are just some that have gained a foothold in the market, get good reviews and offer live support. It’s probably a good idea to try the ones offering trial periods first – once you’re set up, it can be tricky to change.
What if I’m no good with numbers?
If the thought of spreadsheets fills you with dread, you could always find an accountant. Anyone can call themselves an accountant, but it’s best to find a chartered accountant. This means they are registered with a professional body (the Association of Chartered Accountants), have undertaken three years of training and passed financial management exams. Find someone in your area on The Institute of Chartered Accountants’ website.
The usual rules apply when looking for a service – ask around. Do you know people who run small businesses who can advise you about their accountancy services? When you’ve found someone, always try to get a fixed fee for their services up front. This will help you avoid any unwanted costs and ensure all the services you require are included.
A lower cost option to help you set up accounting software and build reports tailored to your business is to work with a registered bookkeeper. Bookkeepers are trained professionals who specialise in recording financial transactions in an accounting package. Qualified bookkepers can be found at the International Association of Bookkeepers and the Institute of Certified Bookkeepers. You will still need an accountant at year-end to prepare and file your statutory accounts, but you may be able to reduce set up costs and mid year record keeping.
Accountants and bookkeepers have their own subscription to accounting software, so all you’ll need to do is provide them with receipts on a monthly basis and they’ll be able to prepare accounts and maintain a payroll for you. An accountant may also be able to help with financial planning for your business, but expect to be asked questions about costs involved and how you expect sales to ramp up.
Accountants and bookkeepers often specialise in different industries, so it’s worth looking for one that works in a similar industry to your social enterprise.
How will keeping accurate accounts help my business?
Firstly, it is a statutory requirement to keep accounting records. Secondly, if your social enterprise goes well then you might want investment to grow. For example, you might need to pay a salary to another member of staff, or some money to tide you over while waiting for a significant contract to pay out, or maybe to purchase assets like a vehicle or a building. No investor worth his salt will consider you unless you can prove the business is making money. And for that, you’ll need good accounts.
Creating accurate accounts will help you forecast future growth and demonstrate to an investor that you know your business and the sector it operates in. Good luck!
Want more support to start up? Discover our Lloyds Bank & Bank of Scotland Social Entrepreneurs Start Up Programme 2019/20.
Want to keep learning? We recommend reading these next:
- Managing your accounts as a small business from the supportive Small Business website.
- Inspire2Enterprise has some good advice on choosing accounting software.
- The UK government’s guide to company accounts includes a ton of information, including obligations for CICs.
Read more from SSE:
- Finding money to start up a social enterprise
- Writing your first business plan
- Finding a social enterprise mentor