Navigating finances for first-time franchisees

Diligent financial planning can not only help you maximise your franchise's profit potential, but also keep you out of trouble with the HMRC

Starting up a small business is no mean feat. Any budding entrepreneur will encounter reams of paperwork requiring signatures galore, as well as jumping through proverbial hoops with HMRC and other governing bodies, depending on the sector. However, it’s pointless to get stuck into these things if you haven’t yet sorted out your finances.

It might sound obvious, but the lifeblood of your growth is your money. Sure, your drive and your ideas will also influence growth, but it’s sound financial management that allows you to put these ideas into practice. Getting things set up correctly from the start is essential.

If you’re a first-time franchisee, or indeed anyone on the brink of starting a business, following this bite-size guide to best practice will help you to get your finances straight. From VAT to bookkeeping, business plans to budgets, these are matters which AIMS Accountants help with every day.

Put a business plan in place

Having somewhere to put your money is clearly important, but knowing how to spend it is even more so. Some franchisors will ask you to present your business plan for the first few years before they’ll let you buy into the franchise.

Remember, the franchise is their baby as well as yours, and they need to be sure that you’re going to share in the same vision for growth.

Think of a business plan as a roadmap for achieving your goals. Put another way, it should include all the operational methods and marketing tools that you will use to achieve your financial goals. It’s also important to include time frames in your business plan, so you know exactly how much money you’ll have to spend and over what time period.

A business plan isn’t just for start-ups. It will also help you track progress over time – whether you’re doing better or worse than expected in your first months and years in trade.

Limited company or sole trader?

You’ll also have to decide how you want to trade. There are a few options in the UK, but most franchisees will either be set up as limited companies or as sole traders.

But what’s the difference? Limited companies are legal entities, separate from the owners and directors. This means that the company’s income and tax obligations are independent of the income and tax responsibilities of the owners. There are many reasons why franchisees would choose to register a limited company, but the main ones are that your personal assets are protected should anything go wrong, because you are legally separate from the limited company, and it’s a tax-efficient way to work, so your take-home pay could be higher.

To set up a limited company, you must register with Companies House. Once you’ve registered, you’ll receive a certificate of incorporation, and you’re off!

If you are set up as a sole trader, on the other hand, you are the business, so you form one legal entity, not two. To set up as a sole trader, all you need to do is register for self-assessment, enabling you to file a tax return each year, which is a legal obligation if you’re charging people for a service. Setting up as a sole trader means that you don’t have to worry about filing corporation tax returns as you would as a limited company. There are fewer statutory obligations to abide by too, and you don’t have any commitments to other shareholders and owners.

Some franchisors may impose one way or the other - otherwise, it’s totally up to you!

Registering for VAT

Whether you’re a limited company or a sole trader, as your business grows there are other obligations to fulfil with HMRC. Registering for value-added tax (VAT) is one of these. You must register for VAT if your turnover for the last 12 months was over £85,000.

Registering for VAT means that you can claim back VAT on any goods and services that are used exclusively for your business, such as travel expenses, food and accommodation, fuel and business vehicles and office equipment. Just be sure to keep all your receipts as proof! Not all retail receipts will automatically itemise VAT, so you must specifically ask for a VAT receipt if you want to claim back.

Business bank account

Keeping your personal and business finances separate is vital if you want a successful business. When it comes to allocating budgets for things like marketing, you need to know exactly how much money is in the business coffers without muddying the waters with your own finances. Mixing your finances is also a sure-fire way to get into a long-drawn-out contest with HMRC over taxes, for example.

But which bank should you use? It might be tempting to use the same bank as you do for your personal account, which is fine. However, don’t forget to look at new disruptor banks, like Starling and Cashplus, too. They might give you more perks than traditional high street banks.

When you open an account, you’ll need to provide documents and information including proof of ID for all directors, proof of address, your full business address, contact details and your Companies House registration number.

When buying a franchise, your franchisor might have an agreement with a specific bank in place, so ask first. At AIMS Accountants, for example, we use Cashplus Ltd as our preferred supplier.

Bookkeeping software

If you want to make sure that you always have accurate financial records, use integrated bookkeeping software. You may have seen the popular QuickBooks adverts lately that sound like they’re turning the dial up to 11 on the classic Bachman & Turner song Takin’ Care of Business. These adverts are not only entertaining, they’re also right. If you invest a little in your bookkeeping, made easy by using software like QuickBooks or Xero, your business finances will be taken care of efficiently.

What’s more, you can now use additional software to integrate with the likes of QuickBooks and Xero to input your receipts automatically. With software like AutoEntry, you simply take a picture of your receipt and the bookkeeping software will do the rest. You’ll never forget to claim back your VAT ever again, and you’ll always have accurate financial reporting!

Use your accountant

Finally, it goes without saying, but use your accountant (or if you don’t have one, get one ASAP)! They are there to help you with your financial decisions and will give you sound advice on how to maximise your profits.

Accountants add value to your business by figuring out the most tax-efficient ways to take money out of the business. They’ll advise you on how to make the most of your take-home pay and what you are able to claim back VAT on. Accountants also act, for many small businesses, as your business advisor. Other than you, they might be the only people who are close to your business and involved in your growth, making your business more profitable, while remaining compliant with HMRC.

The author

Jason Burton heads up the technical support team at AIMS Accountants and is a fellow of The Association of Chartered Certified Accountants (ACCA).