Describe the legal and financial aspects that will affect your business start-up.
Describe the legal and financial aspect that will affect your business start-up
Legal aspects – Introduction
There are many laws and regulations surrounding the conduct of a new business. All businesses will have similar legal responsibilities.
For my business I choose the legal status to be sole-trader, because is the simplest and the cheapest form of business to set up.
Advantages of being sole-trader:
- The business can be easy to set up
- Independence in decision making
- Minimum of paper work
- The sole trader may have flexible working hours
- Knowing customers helps to avoid bad debts
Disadvantages of being sole-trader
- Unlimited liability means the owner is responsible for all debts
- Long working hours
- In case of illness the business is closed and makes no money
- Difficult to rise capital for start up or to expand business
The key legal aspect is liability, which means I as the owner of the business will have legal responsibility for the actions and the finance of the business itself. Because I choose to be sole-trader I will be fully responsible for the debts of the business and its actions.
Trading terms and conditions
Because I going to sell product I have to set clear terms on which the product will be sold to avoid future disputes arising. The terms and conditions of selling will also protect my business unreasonable claims from customers. The terms of sales should include price details, payment terms and arrangements.
Trading standards protect consumers from unscrupulous traders. The Supply of Goods and Services Act (1982 ) state that goods must be of satisfactory quality and fit for the purpose for which they are sold. A buyer who has a genuine complaint about faulty goods can ask for money to be refunded by the seller.
For my business it will be important to be aware at early stage what my responsibilities to customers are and also what rights do I have if buying from suppliers. The Trades Description Act states that goods must be as described, including quantity and size, quality, specification, ingredients, features, dates and place of manufacture.
Certain trades require a licence from the local authority. These include businesses dealing with food, alcoholic drinks, gaming etc. Licences are regulated by local authority. The business will provide customers with the service which is selling fresh coffee and fresh made cakes, so it must obtain a licence from local authority in order to provide the service legally.
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Under the regulatory reform ( fire and safety ) order 2005, the business owner is responsible for removing the risk of fire as far as possible and draw up emergency plans for dealing with the fire if it happens. All those who use the premises must be able to escape and is very important that all fire equipment is in working order. The law is enforced by the local fire authority.
Health and Safety
The Health and Safety at Work Act makes the business owner responsible for the health and safety of everyone affected by the business and its activities. These include:
- Employees working at the premises
- Members of the public
The business owner is also responsible for anyone affected by the product or service the business supply.
Local authorities have the power to introduce laws that apply to their own geographical area. They can also give planning permission and specify building regulations. Alternations to the building structure or to the use of a building must be approved by the local authority planning committee and local residents.
Because the business is planning to employ people it has to comply with employment law. The most important legal provisions are:
- The business must provide secure and safe working environment
- All employee must receive written contract within two months of starting work
- All employees have the right to the national minimum wage
- The business has to deduct the income tax and national insurance contributions and send these to HM Revenue & Custom.
Data Protection Act 1998. Because the business is going to hold personal information about employees and clients records it is the business responsibility to keep the record secure and confidential.
Financial aspect – Introduction
Managing company`s finance is very important to comply with the law. Poor financial planning is likely to result in the business failure. Paying attention to the financial aspect of the business early will give better chance of success.
Personal survival budget
The business must recognise that the owner must survive as well as the business. The business owner needs to ensure that the business brings in sufficient income to cover personal needs.
This requires some planning and is often done by means of personal budget.
Planning personal survival budget
Majority of small businesses do not require significant funding to get started. But all new businesses are facing start – up cost and these include:
- Cost of premises
- Cost of equipments
- Shop fittings
Most of small businesses use combination of funding rather than one single source. The business will need finance to cover for their essential assets for their activities.
There may be times when the business may be prepared to sell for cost or below cost – special promotions, offers; however a business must charge sufficient for its product to cover cost and provide sufficient reward for its owners. There are number of approaches to pricing and a business may use more than one, depending upon circumstances. The most common used by small businesses is
- Cost-plus pricing; this means the business charge for their product enough to cover all cost incurred in production and earn profit.
Monitoring financial control
Financial data and forecasts from the basis of business ability to raise finance negotiate the purchase of the premises and order raw materials. If the business is inaccurate in their forecasting then there will be insufficient money available to the business. Potential problems regarding cash flow or profitability must be considered at every stage. If there are shareholders they will be demanding the true state of affairs within the business.
Cash flow forecasting – is the simplest form of recording cash received by the business and indicating when cash will be needed to pay bills. The business must be able to pay their bills on time, so the cash flow enables them to estimate their ability to do this. A new business will include a cash flow forecast in its business plan where the bottom line estimates the monthly cash surplus or deficit.
Break – even forecasting – a business break – even when the sales revenue generated in a trading period is sufficient to cover running cost so there is neither a profit nor a loss. Sales beyond the brake – even will generate profit. By calculating break – even point the business will be able to see how much they have to produce or sell to start generating profit.
Profit and loss account – is used to calculate the total income received during a period of time and total expenses incurred during the same period. A profit forecast can be made in order to establish the level of profit that the business is hoping to produce at the end of specified period.
Source of finance
Owner`s capital can be used for the purchase of fixed assets in the start-up phase or as a source of working capital used for daily running costs. The amount of capital required is a major factor in determining the appropriate form of business organisation. In order to find the capital the business will use a number of methods, including;
- Borrowing ;
- Bank loans are offered for a period of time and must be repaid in regular instalments at an agreed rate of interest
- Overdrafts enable the business to overdraw on its current bank account. Overdrafts are repayable on demand.
- Loans from friends may be offered for lower rates of interest or even interest – free. The period for repayments may also be more flexible
- Commercial loans are long term loans used to buy lands or buildings. The property bought by the business is a secured against the loan and may be repossessed if the business cannot repay it.
- Grants are available from UK government for specific types of business activities or those located in regeneration area, for example funding from EU Convergence Programme or Regional Development Grants.
- Other methods of financing
- Leasing – business can hire assets instead of buying them, the main benefit from leasing is the assets are available immediately without need to pay
- Factoring – means the bank will pay 80% of the business invoices immediately
- Advertising and sponsorship – certain businesses can be attractive to advertisers and sponsors and some organisations depend almost entirely upon it, for example TV companies, sporting teams and events.
Every business, whatever its legal structure, must keep accurate financial records to enable tax to be calculated on business profits. Each business must:
- Send final accounts comprising profit and loss account and a balance sheet to HM Revenue & Customs at the end of each financial year.
- Register for VAT where annual turnover exceeds the threshold set in the Chancellor`s budget
- Deduct PAYE and NIN from employees
In addition to that, under the Companies Act, limited companies must publish an annual report and accounts. A copy of the report and account must be send to Companies House where will be available for general public for a small fee.
Explain legal and financial aspect that will affect the business start - up
For business to be successful considering financial implications is vital. Looking at finance required for the start-up cost will enable to judge how much money a business are going to need for start up and running costs, then the business should consider the profit it could potentially make and then decide accurately when they are likely to succeed.
If the business is planning to take a loan which has to be paid back it should work out when the money is going to be coming out of the business, the revenue should be able to cover this and before implementing the business plan it should be certain that the business can afford to pay these costs.
Cash flow problems may be caused by lack of interest in company`s product this can be a major problem for any business as it can lead to poor credit ratings and increased interests on the company’s debts.
When a business is setting up it has to abide by laws to ensure that the business will not face any legal action against it. Legal changes can happen all the time over the course of a business’s running. Legal changes can force the business to change the way a business operates and can have an impact on how employees have to set up rules to ensure the safety of its employees. Changes to tax laws and minimum wage can have an impact on the finance of a business.
The categories that legislation changes fall into are:
- Health and safety can look at aspects of how the business is protected against fire and precautions that are taken for various dangers. Examples of laws that may affect these rules are food hygiene, environmental health – weights and measures.
- Employment law can change the way that businesses are allowed to hire employees and regulations that they must follow to ensure that employees are chosen fairly. Examples of laws that will have to be followed in these cases are National Minimum Wage laws and contracts of employment.
- Consumer Protection this looks at how information is kept about customers, when a customer makes a purchase with the business; the business has to ensure it has the consumer’s permission to keep the data. This data has to be kept securely within the business. Examples of laws that will have to be followed in these cases are data protection, trade description and sale and supply of services act.
- EU Law will have to be taken into consideration by a business when trading with other countries and shipping out packages.