Running a small business comes with a whole host of financial responsibilities and learning how to manage your finances properly is crucial to your success. These are my top 5 tips for managing your small business finances. Let me know if you think there is anything I have missed.
Set up a Business Bank Account
In fact, I am going to tell you to set up at least two business bank accounts! As a business owner it is really important to keep your business and personal finances separate. As a limited company you are really going to want a bank account in the company name. It looks more professional and is less liable to be queried by your customers. There are some really good offers out there (high street and online) and some of the online ones offer some excellent deals on accounting software which is really worth looking into. If you are a sole trader even a personal account which is separate from your day-to-day personal finances is going to make everything so much easier.
But why two bank accounts I hear you scream! Well, if I had a quid for every time a client of mine is scrambling around trying to find the cash for their tax bill (whether corporation tax, income tax or VAT) I probably wouldn’t need to be writing blogs for you lovely lot!
Take your estimated tax out of your income the minute your customer pays you and put it in that all important second bank account. If you are VAT registered 20% of the cash you receive is not yours – put it away! Corporation tax and income tax rates vary depending on your situation but I would suggest putting between 10-20% away depending on your business. Please ask for advice if you aren’t sure what is appropriate for your company. Just think how much less scary self-assessment time would be if you knew you had the cash put away to pay your bill!
Create a Budget
Develop a monthly or annual budget. This is an estimate of what you think your income and expenses is going to look like for the next month or year. This is really important as you want to make sure that the shiny new thing you are thinking is going to revolutionise your business and make you an overnight millionaire is affordable.
Include everything that you can think of: income projections, payroll (include paying yourself), operating costs, taxes, loan repayments, big ticket items like computers etc). EVERYTHING. But here comes the important bit. REVIEW IT REGULARLY. Compare it to your actual expenditures and income and definitively review it BEFORE making that big purchase or financial commitment.
Now I know for many of you this is terrifying. Spreadsheets are not your bag and the numbers make you come out in a rash so ask your accountant for help. I can certainly help you pull together a budget for your business and monitor your actuals against it. I also have a number of strategies which are even simpler! As easy as checking your bank account (something I assume most of you do). The key is understanding whether you have the money for that bright shiny new thing BEFORE you commit to the spend.
Control Expenses
This one seems obvious but it is so important. When you start a business so many people focus on that top line – how much can I grow my sales and they throw any amount of money after it. There is no point growing your sales by £1 million if you spend £2 million to do it.
Look at your expenses critically and in detail. What do I need to fulfil my current client needs and what is a nice to have? If I spend this on marketing (for example) to grow my sales, how am I going to measure whether or not it was worth it?
Finally, document EVERYTHING. Keep your receipts, file documentation, pay out of your business bank account for easy tracking. Pay bills on time to avoid late fees and shop around for the best deals on supplies and other recurring expenses. A cloud accounting software (like Xero) can help you with this but as with any software it is only as good as the information you put into it. If you aren’t sure if you are using your software well, please ask. I am happy to give lessons on how to get the best out of your accounting software.
Bill clients
So, this one is different for all of you and doesn’t apply to some of you who use a third party such as shopify or amazon to make sales through but it is important to know who you are expecting to pay you and when. Do they know when their bill is due? Is it on the documentation that they receive? How are you going to identify if they do not pay you on time? Are there some clients who are always late paying you? Can you give them an incentive to pay you more quickly? Talk to them find out what their issue is and see if you can help them resolve it? Maybe for them a PAYPAL, STRIPE or GOCARDLESS feature is worth investing in.
Filing Taxes Properly
Filing your taxes properly and on time are really important. HMRC are not going to throw you in jail if you are late paying your VAT but they are going to issue you with a penalty point. Too many penalty points and they start issuing penalties and if you still do not seem to be taking due care with your taxes you are more likely to get an investigation. All of the above cause stress, money and time away from you managing your business. Your accountant will help you file your taxes but at the end of the day they can only help you with the information that you give them. If you do not provide information on a timely basis, they cannot provide your tax returns to you on a timely basis. Your businesses taxes are you, the business owners, responsibility and this cannot be delegated.
Have a good relationship with your accountant, try and work with them and see them as a partner in your business. Look for someone who will answer your questions and help you understand what you need to do and when.
Taxes can be confusing and painful and getting advice can often save you money, time and anxiety but overall submitting and paying your taxes on time even if a mistake is later found is much more likely to result in HMRC tolerance and help than repeated late filings and penalty payments.
Those are my top 5 tips to help small businesses with their finances! I am sure I have missed loads – so why don’t you drop me a line and let me know what you do?
