6 tips to help manage your small business finances
Updated: Jun 26
Small business owners are brilliant at some functions in their business - we often see businesses who are totally on top of their operations or their sales and marketing. But when it comes to the finances, it’s the finances that can break the camel's back so to speak.
It’s true that of all of the different aspects of running a small business, financial management is the one that causes the most stress, headaches and heartache!
For example, you need to understand the accounting terms. Then you must be clear on what the numbers are telling you. Then there’s the requirement to make sure you have everything ready to calculate the tax you owe and the tax you have to pay – and have the funds to cover the payment.
How do you know you are claiming for everything you are entitled to? How to you know it's all done correctly and at the right time?
The good news is none of this has to be hard or complicated if you first check out these 6 ways.
What does managing your finances really mean?
Firstly you need 3 key elements:
1. Be proactive Knowing what you need to know and when you need to know it to ensure you have the right data and numbers to hand when you make business decisions.
2. Be in control Make the numbers work for you. This means having numbers that you understand, are in the format you need, when you need them and give you a view on the key areas of the business that you need to monitor and tweak if necessary.
3. Be responsible It’s your business, your finances and your numbers. So ultimately, it’s up to you to make sure the data is collected accurately and put in the right place at the right time. Doing this day by day can have a massive positive impact on your business. It’s the small steps which are under your control done consistently have the biggest impact.
6 ways to managing your small business finances: The key is to start small and do it consistently over time. Quick wins will compound into bigger wins over time and you;ll gain confidence.
Here are the first simple steps:
1. Get an expert on your side
Yes, shameless plug, but your optimal chances of achieving financial bliss is with a trusted expert to do all this for you. A recent survey found that small business owners gained an average 6 hours per week by doing just that (Xero 2020) so this is a big win as you can then spend time on your business - not in it. The your accountant will help you spot the gaps and work out a plan to plug them together.
What do you need to survive? This needs to be an accurate number based on what you actually spend rather than what you think you spend (and it shouldn’t involve taking money out of the business). At the very least your business needs to be able to sell enough to pay you an income after all costs and taxes have been taken paid.
3. Keep your numbers separate Keep your personal and business banking and transactions separate – this makes managing the finances so much easier. Open a separate business bank account for all business transactions and connect it to your accounting software such as Xero. This will result in faster, more accurate real time data flowing automatically into the right place at the right time, giving you an up-to-date view whenever you need it.
4. Know the controls The ‘controls’ are the numbers that give you an accurate picture of what is happening in the business. Each business is different and the controls can vary depending on the type of business. However, an easy starting point involves looking for the biggest and most important numbers in your business.
The main 5 numbers to consider:
Sales: The total value of sales you have made. Increase control of this by knowing where the sales come from and how can you grow them.
Cost of sales: Costs that increase when you sell more and decrease when you sell less. Increase control of this by knowing how to keep them as low as possible.
Overheads: Fixed costs you pay each month regardless of sales. Increase control by only incurring overheads that are essential. In addition, work to get the get the best price possible ,then monitor this regularly.
Gross profit: Sales minus your cost of sales. Taking control of your cost of sales helps you maximise your gross profit. Increase control by regularly reviewing the prices you charge customers and avoiding offering discounts. However, if you decide to discount, be confident that you’ll ultimately generate the return you want.
Net profit: Gross profit minus overheads. The number after tax must at least equal what you need to survive.
5. Automate Increasingly, many systems are moving to the cloud and this has massive benefits for small businesses. You;re now able to provide not only a personal service as a small business, but able to provide it in a slick and 'always on' customer focused way. Tech is your highly motivated, able (and low cost) assistant who can manage your low-value, repetitive tasks.
Reporting: Use reports and dashboards to monitor the financial health of your business.
Profitability: Profit and Loss Report – Understand how the profit is performing and enable you to view cost of sales, gross profit, overheads and new profit.
Cash: Balance Sheet – Shows where all of your cash is currently located - what is tied up in stock, what is owed to you by customers and what you owe.
What you are owed: Aged Debtors – Who owes you and how long payments have been outstanding.
What you owe: Aged Creditors – Which creditors are overdue and who is chasing you for payment.
If this seems a little daunting your accountant will be best able to help you make sense of the figures and any actions that are needed. 6. Review There three key areas to review: Know the numbers: Do you have the data to provide accurate view of the business? Understand the numbers: Do you understand what the numbers are telling you and actions that may be needed? Validate the numbers: Are the numbers consistent with your goals?
An accountant can help you to understand, forward plan, set goals and keep track - all essential for managing your business finances effectively.
Tackling your finances may be initially a bit of a task, but taking the time to get them working for you is well worth the effort. You'll develop a more successful business, achieve your business goals, reduce stress and gain that all important time – all while increasing your confidence and ability as a business owner.
If you'd like help with your small business, get in touch for a no obligation chat with a friendly expert at Purple Accounts. You've nothing to lose and so much to gain in managing your business finances. Request a call back or get in touch here