Chances are, the reason your small business is a success is because of your skills and expertise. You might make a great product or provide an exceptional service, and you do it with energy and care. However, it's unlikely you have the same zest or experience when it comes to managing the business' finances.
If you find financial management a challenge or a chore, you might be developing bad financial habits which could harm your business.
We've put together 12 business finance tips for you, collated from our years of experience helping SMEs grow and thrive.
1. Build up a cash reserve
It might be a bit late for this first piece of advice, however if you can, try to keep some cash in reserve. You never completely know what is around the next corner, even if you've got Google maps...
2. Plan for your tax bill
Set aside a percentage each month to pay NI, PAYE, VAT bills and corporation tax. If you struggle with quarterly VAT, consider changing to HMRC's monthly scheme where you pay the estimated amount each month and then file one return at the end of the year.
While Kwasi Kwarteng has cancelled next year's planned corporation tax increase of 6%, it's still the lowest in the G7 and seems unlikely to remain at 19% long term. Bear this in mind when planning for the long-term.
Good financial practises which put your business in the best position possible will be key to its success.
3. Invest in growth
It's certainly not easy to stay on top of the bills and still have enough cash to invest in growth. However, businesses don't have a static growth trajectory; they generally either go up or down. Plan ahead 5-10 years so you don't fall behind the competition. Understand your industry and what drives your business.
4. Don't be afraid of credit
Use credit to purchase new equipment, grow your team, invest in R&D and improve cash flow temporarily so you can pay your employees and suppliers.
5. Keep on top of your invoices
Make sure you invoice for any work as soon as you can, and take action to make sure you're paid swiftly. (We've previously written about the 'late payment crisis' if you'd like to read more.) Don't feel guilty about chasing unpaid invoices, you've done the work and deserve to be paid! Be creative if clients aren't paying you on time - consider offering discounts for on-time payments.
6. Create a cash flow forecast
A cash flow forecast will help you understand if you're going to run out of money, and when, so that you can plan for it. It is essentially a prediction of when money is going in and out of your business over time, whether that is a week or a year. PWC offers some tips for forecasting in this useful blog post. Once you've got a cash flow forecast in place, track any variances between the projected and actual figures. Use this data to help you effectively manage the business. Do you need to get credit? Do you need to reduce staffing costs? Do you have regular slow periods? While you're at it, create a personal cash flow forecast as well.
Bills shouldn't be a surprise when they land on your desk. With a cash flow forecast you know what to expect so you can prepare.
7. Check your books
It's not a question of trust, but rather one of proper oversight. Monitor the books, regardless of whether you're working with an accountant, bookkeeper or have a manager who helps out. Make sure to keep up with bank reconciliations (one week's transactions are much easier to check than 3 months' worth!) and look out for unnecessary spending and potentially even embezzlement. Creating internal financial protocols mitigates fraud and risk, and will also help ensure you and your employees are operating in a lawful way.
8. Keep good business credit
Pay off your debts on schedule, or sooner if you can. It's also a good idea to pay your business credit card monthly by direct debit and not keep a balance on it. Don't take out loans you can't afford, or loans that are too big for you to pay back. If you're struggling with multiple debts, rebuildingsociety.com offers debt consolidation loans. This won't negatively impact your credit, and could help you get a lower interest rate.
9. Find a mentor
Check with your chamber of commerce, local networking groups, or Mentorsme.co.uk to find a mentor in your area. Even if you think you don't have time or don't need help, investing your time in this way could provide new insights to help you manage your business more effectively.
10. Analyse ROI
What brings you value? If a business practise or marketing initiative isn't contributing positively to the P&L, stop doing it. Change it up and spend on what does work.
Not many customers after 4pm? Change your opening hours. Google ads not leading to conversions? Try LinkedIn and Facebook ads. Test, analyse and tweak.
11. Keep accurate financial records
When you're busy, it's easy to leave bookkeeping and financial admin tasks for later. Primary business functions require your time, and they can't wait. However, by the time you have a minute to enter those expenses or update your accounts, you've lost the VAT receipt, or have forgotten what a spend was for. We recommend working with a bookkeeper or accountant, even if you only engage them for a few hours each month.
12. Separate your personal and business funds
A separate business bank account is essential. This helps protect your personal assets and makes the business' financial management much simpler.
Focus on actions you can take to put your business in a good position
In a survey by the Federation of Small Businesses earlier this year, nine out of ten companies reported a rise in operating costs compared to last year. Businesses already squeezed by increased taxes, expensive raw goods and high petrol prices will be further affected by this month's rising utility costs. Not exactly an uplifting forecast for most small businesses.
This is why it is so important to manage your business' finances effectively. You've got to be at the top of your game if your business is going to come out ahead.
Disclaimer:
For the avoidance of doubt, the content recorded in this article does not constitute formal advice. It is always recommended that you seek professional advice before acting on any articles or information included.
