Powered by iSpeech
Earlier this year, a survey by Purbeck Personal Guarantee Insurance revealed that one in two (49%) small business owners believe that their mental health has been affected by financial concerns.
Those affected are most likely to be owners of businesses employing two to ten people, are the sole decision-maker for the business and have been in operation for somewhere between five to ten years.
When you set up in business, it is likely that you wanted some flexibility and control of your work life. It’s unlikely that you wanted more to have a negative impact on your mental health. Therefore, it is important to get on top of your business finances to avoid unnecessary stress in the future.
A business will not survive long term without having a robust financial management system. If this isn’t in place, not only will it become increasingly difficult to run the business, it will also be stressful for you as a business owner.
Financial management is as you’d expect – the system used to look after the finance side of the business. It is broken down into income, expenditure, saving and investing. Each of these areas needs to have a clearly defined system. Let’s look at these now.
All sales need to be invoiced, recorded, and the income received as soon as possible. Nowadays sales are usually invoiced through an accounts software system such as Xero. The importance of entering information correctly and clearly onto sales invoices cannot be stressed enough.
In particular, the information on the sales invoice should include:
- The amount should agree exactly to the amount quoted.
- The purchase order number given to you by the customer – if there is one.
- The due date of payment.
- The correct VAT rate if applicable.
- Your payment details clearly entered.
Invoices should be sent as soon as possible, either after service/product has been received or in advance, depending on your payment terms.
It is crucial to follow up on your sales invoices so that you have sufficient cashflow in your business. I would recommend notifying your customers a week before the invoice is due to be paid. Just a polite reminder – nothing heavy! Regularly, at least once a month, but once a week would be better. It’s a good idea to chase your debtors. This is a task that most people don’t like but it’s one of those that you have to get on with anyway. If you find it extremely difficult, this is a task you could outsource or delegate to someone else.
All expenditure needs to be recorded and supported with documentation. In the same way as sales, this tends to be recorded into accounting software nowadays. Each item should be supported by an invoice so that if you need to, you can look back at the invoice.
If expenditure is regularly entered into the system, then this can be matched against bank payments. The sales invoices are already on the system, so when these have been paid they can be reconciled. Having the bank reconciliation means you can rely on your figures.
Both income and expenditure need to be included in your budget. I’m aware that this is another task that can end up on a seemingly never-ending and growing list, but it is worth doing, I promise! With a budget, you’ll have more clarity on your finances and less opportunity to bury your head in the sand.
In a budget, this will ordinarily be when the sales are invoiced but I think it’s more useful to enter the date you expect the income to be received.
By entering all of your expenditure you can see where your money is going. I’ve heard so many people – both business owners and individuals – say they can’t understand why they haven’t got any money! A budget will show you where it’s going, but remember to include everything. Go through your expenditure with a fine-tooth comb and decide if you can make any savings. Are all of your subscriptions necessary? Can any reductions in anything be made?
By budgeting you will be able to identify any peaks and troughs and do something about them. But remember, for a budget to be useful it needs to be kept up to date. It’s a working document so it’s no good preparing it and then giving yourself a pat on the back and filing it in a drawer!
It’s important to have enough money available in your current account to cover day to day expenditure. This is where your budget will be useful as you’ll be able to see what this magic figure is. The balance needs to be kept in a savings account which is not as accessible. It’s a good idea to save enough to cover your VAT and corporation tax so you’re not taken by surprise.
It’s a worthwhile exercise to keep an eye on your current account bank balance and make transfers regularly to your savings account. You may as well earn some interest before you have to pay the money over to HMRC!
Once you have sufficient funds to cover your day-to-day expenditure and any payments to HMRC, you could consider investing. Maybe put your funds into government bonds as these are considered a safe investment. Corporate bonds can also be explored if you’re looking for higher returns, but these are more risky. It’s a good idea to speak to a financial planner before undertaking any investing.
So, this is financial management in a nutshell. I’ve covered why it’s important to invoice regularly and chase debtors, enter expenditure and reconcile your bank account, budget, and save. However, to give you overall clarity, focus and above all, peace of mind, a financial plan is needed. It doesn’t need to be complicated – one succinct page is fine.
A financial plan will include:
- Your business goals for next year and five years. Be as specific and clear as you can be.
- What are you predicting your levels of turnover and profit will be?
- Include your exit strategy – depending on your age, of course!
- What growth plans do you have for your business, if any?
- Are you happy with your current pricing? What is your plan for your prices over the next year and five years?
By reviewing your financial management system and making any necessary amendments, you will feel calmer as you’ll be taking control rather than feeling overwhelmed. It may take time to have your system up and running in the way you want but it will be worth it!
If you need any help with understanding your business finances, why not book a FREE Discovery Call with me today.