A guide to managing small business finances

Managing your finances can be a tricky aspect of self-employment. With no regular pay packet, how can you keep your bank balance healthy? Here’s some advice. 

If you run a small business you’re no doubt already well aware of the advantages: the independence, the creative control over the vision and direction of your business and the chance to forge a unique niche in the marketplace doing what you enjoy. The challenges are often more mundane: the legal status, insurance, tax affairs, the small business cashflow and general day-to-day financial management of your business. But managing finances needn’t be a headache. Our small business finance guide is a great place to get started.

The importance of financial management for a small business

Small and medium sized enterprises, and those who are self-employed, play an important role in the economy, which is why there is a great deal of support available to help small businesses to manage their finances and to thrive. When you are starting out or running a small enterprise, learning how to manage finances in a small business is key to ensuring its continued success. If you don’t have a robust approach to your financial management then there can be bumps further down the road. Get it right - ideally from the outset - to free yourself up to focus instead on growing a sustainable, prosperous future.

Why managing finances can be a struggle for the self-employed

While you might be a financial wizard, invariably there are cashflow challenges. It’s understandable that while you might expect customers or clients to pay you promptly the reality is this is not always the case. Meanwhile, you continue to invest in overheads and outgoings to keep the mechanism of your business running smoothly. Dealing with late-payers can be alarming – especially if your business comprises a few but significant clients or customers on whom you depend, but a firm emphasis on your small business’ money management will help ameliorate some of that anxiety. Creating a financial ‘buffer zone’ or contingency can help you through leaner times or quiet periods. Using the quieter times to generate new business and focus on strategy and marketing can be a great investment for later on, helping to reduce your dependency on a few clients that might not be reliable payers.

The flip side of this scenario is busy periods. Small businesses and the self-employed in particular can feel overwhelmed when work floods in and there’s limited capacity to respond, but there’s a strong desire to make the most of the abundance while it lasts. At times like these managing your finances by keeping track of your ingoings, outgoings and investments is more important than ever.

Get your record-keeping right

Good record-keeping underpins the financial health of any business and takes the strain out of your tax return and annual accounts too. When you’re keen to crack on with the day-to-day operations of your business, it’s easy for your attention to be diverted from the basic record keeping required of small businesses. Luckily there’s a great deal of free support available from the  Inland Revenue . Most of the questions you could ask are answered, from what to do if you invoice a client in one financial year but don’t get paid until the following year, to what VAT and PAYE records you need. The trick is to keep on top of your small business’ record keeping regularly so it doesn’t build up, plus discrepancies and patterns can be identified and accounted for and cashflow problems anticipated.

Separating business and personal finances

Even if you’re a solo enterprise, it’s important to distinguish between personal finances and those belonging to your business. There are a number of reasons for this, but perhaps the most compelling is that business finances must be transparent, and accessible at any time by HMRC. There are lots of advantages to clearly separating your business and personal finances, not least that you can offset the utilities and resources you use in the running of your enterprise against tax. Having a separate bank account for your business activities can be very helpful for distinguishing between business and personal incomings and outgoings. But this is not always essential if you are self-employed as long as the rest of your record keeping is robust and orderly.

Making a plan and monitoring your small business finances

Creating a cashflow forecast is the best way to help you in managing your small business finances. A cashflow forecast will help you to plan how much you expect to make each year, how much you anticipate spending and when payments will arrive and leave your bank account. Regular checks on your invoicing and payments give you a real-time understanding of your business and ensure managing your finances is an integrated activity. In other words, try not to wait until the end of the tax year before taking your records seriously, as at this point it’s more difficult for queries to be resolved.

Choosing the right small business money management software

If you struggle to keep track of bits of paper then there’s a great deal of small business financial management software that can help you to manage your income and expenditure. You can choose between desktop and cloud-based solutions depending on your prefered way of working. Software can help you to customise invoices to your clients and keep track of your bank accounts where you can reconcile them. Software can even help you to calculate and submit VAT returns securely to HMRC. There are different levels of software depending upon the nature of your business, whether you’re a sole trader, a partnership, whether you have employees, and so on, so there’s plenty of flexibility that will help you keep on top of things.

Getting help with financial management

As the business owner or manager you will doubtless be keen to keep your eye on your business finances, but hiring someone to help with financial management in the form of a bookkeeper or accountant can be of great assistance and allows you to free up the time you need to spend on other aspects of your business. The nature of the financial management help you hire depends upon your budget and needs. You might simply need someone to help out with your self assessment tax return as a sole trader, in which case a little bookkeeping help might be sufficient, or the more complex demands of being an employer and managing your VAT for which an accountant might be more help.

To get a more accurate idea of the kind of support you might need to assist you in your business finances it’s worth referring to the free  government guidance  available.

Ensuring the security of your business

No matter how well you manage your money and strive to keep a healthy bank balance, a single mishap could put a strain on your business and jeopardise the fruits of your hard work. Get affordable  small business insurance  from NatWest.

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