As small business owners or entrepreneurs, it’s essential to ensure your finances are efficiently organised and kept up-to-date.
For individuals in the early stages of their business journey, keeping track of budgets and expenses can appear to be a daunting task that seems to require a breadth of knowledge that only accountants possess.
This leads to many small business owners neglecting critical aspects of keeping their finances in order, instead choosing to solely focus their time on what they know best – perhaps making sales, generating leads or just their general day-to-day business activities.
But the importance of keeping your finances in check cannot be understated. Ultimately, it is the backbone of success for any business as it allows you to take stock of where you’re at right now and forecast into the future to recognise where any issues may arise.
This brief article explores some of our most important financial tips for entrepreneurs who are still finding their way in the business world.
Separate your personal & business finances
If you don’t have a business bank account yet, this should unquestionably be your first task. In order to properly keep track of your business’ revenue and expenses, your personal and business’ finances must always be kept distinctively separate.
Some sole traders and small business owners operate without a business bank account and rely solely on their personal bank account to receive funds and make business purchases. While this may seem like the most convenient option, it’s sure to lead to problems in the future. As your business begins to pick up pace, monitoring its financial activity can become a hugely complex process with revenue, costs, creditors, debtors, salaries and other obligations to potentially keep in mind.
When it comes to the end of the tax year, you’ll find yourself having to trawl through personal and business transactions to have the correct figures at hand to calculate your tax return. That isn’t only inefficient and hugely tedious but can also lead to inaccuracies that HMRC may penalise.
A separate business bank account also gives you the option of applying for loans or a line of credit to pay for your business expenses – a crucial step for most entrepreneurs and businesses as they look to consolidate their growth and expand their activities.
Opening both a current and savings account for your business is highly recommended. The former would be used for day-to-day expenses whilst the latter allows you to build up a buffer in case of any unforeseen costs or liabilities.
Bear in mind you must first establish your business as a separate legal entity to open a business bank account. This typically takes the form of a limited liability partnership (LLP) or a private limited company (LTD) in the UK.
Log all of your business expenses
As already touched upon, one of the most common pitfalls for small business owners and entrepreneurs is not keeping track of their expenses, which can be fatal for those who rely on consistent cash flow and don’t yet have a pile of savings to fall back on.
Keeping accurate records of every business expense is vital not only for ensuring your business remains viable in the long run, but it also has its benefits for paying your tax at the end of the year.
HMRC allows sole traders and self-employed business owners to claim a range of different costs as ‘allowable expenses‘, which can be subtracted from your turnover to reduce your taxable profit and the amount of tax for which you are liable.
For example, if your business reports a turnover of £20,000 but also claims £5,000 in allowable expenses, you are only required to pay tax on £15,000 (£20,000 – £5,000), which is your ‘taxable profit’.
However, HMRC has strict guidelines regarding these expenses and not every business-related cost may be claimed as part of your return.
Per HMRC, the following is a guide as to what may be permitted as an allowable expense:
- office costs
- travel costs
- clothing expenses
- staff costs
- things you buy to sell on
- financial costs
- costs of your business premises
- advertising or marketing
- training courses
It’s best to speak to a tax specialist or professional who can clarify what you are allowed to claim as there are several additional caveats and factors to consider. For instance, if you use an item or service for both personal and business use, you will be required to calculate the correct proportion to claim.
Increase efficiency with apps and automation
One of the best ways to stay organised with your business’s finances and ensure everything is kept up-to-date with minimal effort is through the use of mobile and website apps that provide help with a multitude of tasks.
Cloud accounting software, such as Xero, can help you with many of your finance-related tasks, including bookkeeping, expenses, invoices and filing your taxes. With flexible plans, available for all business sizes and hierarchies, it’s a must for those looking to keep on top of their financial activity.
Additionally, several apps can help you automate specific tasks, such as paying your bills or a particular creditor on a set date every month. These apps help ensure you aren’t late on your payments or obligations, which is a critical factor in keeping your credit score healthy and getting the best business rates.
Other apps and online banks, such as Monzo, automate manual processes such as moving a set figure or percentage into your savings account every month or paying money into a ‘pot’ on every business purchase.
Make sound rational decisions
It may sound fairly basic but the truth is keeping things simple and staying one step ahead is the crux of ensuring your finances remain organised and in good order.
By consistently taking stock of your business’s financial position and forecasting ahead, you give yourself the ability to make sound choices for your business’s future based on numbers rather than hunches.
But it’s also important not to bet on future income that you haven’t yet received and go all-in on one scenario. You should always ensure you keep a buffer in case of unforeseen circumstances by building up your business’ reserves. Whilst reinvesting in your business is also essential for growth, having cash at hand for any unexpected costs can be the difference in keeping things afloat or enduring a rocky few months – or worse.
It’s always better to err on the side of caution when it comes to your finances, rather than making rash decisions that may or may not pay off. If you’re uncertain of something, it’s better to ask someone more qualified who can give you the guidance you need, even if you’re usually a one-man-band, or one-woman-band, doing it alone.
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At Cue Talent Advisory, we handle all affairs business, management & lifestyle for individuals, businesses, and overseas clients in a variety of sectors. To find out more and set up a chat, get in touch via our contact form, email us directly or call us on 0203 815 8005.