Five Things to Remember and Apply to Managing Your Business Finances
There are 5.5 million active small businesses in the UK according to (GOV.UK, 2021). and of this number, over 20% of small enterprises do not survive beyond their first year, and nearly 60% of small startups fail within the initial three years.
The number one reason 82% of small businesses fail is cash flow mismanagement. These stats aren't to scare you but rather to keep you informed on what you can do better having understood why others couldn’t succeed.
Managing your business finances is an area of your business you can’t neglect. Finance management is one foremost responsibility of the business owner. It doesn’t necessarily mean that you handle it all alone, but you must be aware of it and closely monitor the efficiency of cash flow throughout your business. Read on to find out five simple and essential things you can do to better manage your business finances.
Importance of Financial Management
Helps in Financial Planning and contributes to the growth of the business.
Assists in the acquisition of assets and other key things the business needs to invest in for profitability and growth.
Provides insights to make critical financial decisions.
Reduces financial loss and wastage
Helps in achieving efficiency in operations and encourages a better return for each pound spent/invested.
Promote financial awareness.
Improves the profitability and value of the organisation.
1. Have a Business Account That is Separate From Your Personal Account
For me, this is the number one rule of business finance management. It’s all too common to see new entrepreneurs accepting payments and making business expenses through their personal accounts, after all, your business has just started, and you are paying for everything from your personal expenses anyway. However, separating your business income and expense from your personal income and expense is the foundational thing to put in place so that you can see how much the business is costing you and how profitable/unprofitable (as the case may be) the business is.
There is no way you will be able to easily state how much you have spent or rather invested in your business if all the costs are mixed in with your personal expenses and likewise, you will not be able to see how much the business “Owes you”. The key here is seeing your business as a separate entity from yourself and therefore treating it as one, this is regardless of whether you are registered as self-employed or a limited business.
Not only will it help you to easily measure profitability but it will save you (and/or your accountant) time when it comes to preparing and completing your accounts and tax returns at the end of each financial year. I am sure you don't want the daunting and tedious task of having to go through your bank statements line by line, for the last 12 months, to try and identify which item was for business and even worse having to copy these over before you begin your accounts preparation and tax filing. Running business expenses through a dedicated business account makes it quick and easy to identify the numbers to work with at the end of the year.
2. Understand Your Business' Cash Flow
Cash flow in simple terms is tracking how much cash (not sales) a business receives and spends over a fixed period. Like a well-tended garden, a positive cash flow allows a business to blossom. If you have a positive cash flow, it means you have a greater inflow of cash than you are spending. Meaning you can meet the immediate, short and medium-term financial obligations of your business. A positive cash flow is what allows a business to continue operating and should be the objective of every business.
You can make sales but if your customers are not paying on time or not paying at all it is only a matter of time before the business crumbles.
Here are 5 ways to manage or achieve a better cash flow:
Invest in proper bookkeeping - Investing applies to the time and also the price of paying for whatever resources, knowledge, tools and/or systems you may need.
Generate a cash flow statement and analyse your cash flow
Set up measures for collecting payments faster and more efficiently - ideally even before delivering the service.
Watch how you spend and what you spend on. Paying for certain expenses without prior planning will definitely affect your cash flow. You may be able to get away with this a few times but it won’t work in the long run. Be sure to cut down and forward plans as and when necessary.
Find and work with a great accountant. Cash flow problems accumulate over time. If you have a proactive accountant who cares about your business they will spot the problem on time. But be sure to ensure you have requested the right service - So you are not left disappointed!
3. Use an Accounting Software
Accounting software has become essential for modern businesses looking to streamline their financial management processes. This is particularly relevant for businesses with high volumes of transactions, trying to manage this offline or on spreadsheets alone can become very tedious and cumbersome.
Accounting software allows businesses to automate various accounting tasks, such as invoicing, payroll processing, and expense tracking. As a result, the time and effort spent on this can be channelled towards other more profitable activities. Additionally, accounting software offers enhanced data security compared to traditional manual methods. With built-in encryption measures and secure cloud storage options, sensitive financial information remains protected.
4. Set up the Right Business Structure for Your Circumstances
The type of business structure you have can affect the level of detail and extent to which you may need to keep financial and business records. Whilst best practice is to always maintain the best records possible, being self-employed and using a cash-based method for recording your business income and expenses may allow you to use a much simpler method for categorising and recording expenses.
Having a limited company is likely to require much more paperwork and financial admin but may be necessary for a number of other reasons such as protecting your personal assets in the case of any claims against the business. Please note: This should not be the only factor used to determine which business structure you chose - Remember to consult with an accountant on what's best.
5. Understand Business Finance Options
How you choose to secure funds and investments for your business will have a big impact on how you manage your business finance and can go a long way in determining if your business will succeed or not. There are two major ways of obtaining business finance: equity finance and debt finance.
Equity financing, which is the most common where an investor makes funds available for a share of the business. Most business owners involuntarily chose this option when they put their own money into the business. As the sole owners of the business, all the success (and failure) belong to them. You can of course choose to generate more shares and share the business success with another investor for a fee.
Debt financing, on the other hand, is where you borrow money from a lender to pay back over time or by an agreed date with a certain amount of interest. Depending on which one you are going for you may need to show a clear and specific amount of income, cash flow, and forecast statements. But in the case both of you intend on involving a third party you will need to be able to show clear records to show eligibility for the funds and investment you desire.
Managing your business finances cannot be an afterthought. If your finances impact the very existence of your business, then it must be put at the centre of your business and dealt with proactively.