Managing your business budget properly is crucial for success but many small business owners struggle to implement the right financial systems. It’s a challenge when you’re one person doing everything and having to wear many hats but getting a handle on your finances is essential to the stability and growth of your business.
The facts back this up:
The Office for National Statistics (ONS), states that approximately 20% of UK businesses fail within their first year, with poor financial management being a leading cause.
So, what exactly makes for great budget management, which practices work best for different types of businesses and how can you implement these strategies in your own business?
We’ll answer these questions and more with our 5 best tips for budgeting, to help you take control of your cash.
1. SEPARATE PERSONAL AND BUSINESS FINANCES
If you’ve got the cash from your business tangled up with your personal finances, you’re in the majority.
Research from UK Finance shows that nearly 60% of small business owners mix personal and business finances, which can lead to significant accounting challenges and tax complications.
Setting up a separate business bank account isn’t just good practice – it’s essential for accurate financial management and tax compliance. Separating your money as soon as possible will make your tax returns much easier to manage. Most UK banks offer business accounts designed for sole traders and small businesses, including some which are completely digital and ran through an app. Just make sure whichever bank account you choose, it has the features you need – for example the ability to have a drop box or counter service if you handle lots of cash.
2. BUILD AN EMERGENCY FUND
Saving for a rainy day isn’t usually at the top of any business owners list, a fact backed by The Federation of Small Businesses (FSB) which reports that “80% of UK small businesses don’t have adequate cash reserves to handle unexpected expenses or economic downturns”.
It can seem difficult to save when the cost of living (and doing business) keeps increasing but if recent events have taught us anything, it’s that unexpected challenges happen and we need to be prepared.
Your emergency fund should ideally cover 3-6 months of operating expenses. This provides crucial protection against any downturn in sales, business emergencies and other unexpected costs. If you need to dip into your savings, make sure to top them back up as soon as possible.
3. IMPLEMENT REGULAR FINANCIAL REVIEWS
It might seem impossible to find the time to carry out a review of your business, when you’re busy delivering your products or services to customers, but being strategic about the financial health of your business isn’t just important, it’s essential.
Making the time now to take care of your money can pay off in the future, a practice backed by research from the Chartered Institute of Management Accountants (CIMA), who discovered businesses that conduct monthly financial reviews are 35% more likely to achieve their growth targets and maintain profitable operations.
It doesn’t need to be a big job and monthly reviews can help you:
- Track actual spending against budgeted amounts, rather than guessing at the numbers
- Identify unnecessary expenses, that you can cut to save money
- Create forecasts based on real data, instead of having no plan in place
- Plan for tax obligations, so you don’t get hit by an unexpected and painful tax bill
- Spot potential cash flow issues before they become problems, saving you a lot of stress and potentially saving your business
4. UTILISE DIGITAL TOOLS AND SOFTWARE
You might think we’re biased mentioning how financial software can make your work life easier but even HMRC reports that businesses using digital accounting tools spend an average of 10 fewer hours per month on financial administration.
Not only can going digital save you time, but it can make you more money by putting those hours to use in driving more sales. Using an online invoice generator like Invoicenet can also help with getting that money paid more quickly into your bank account, by helping you keep on top of your due payments.
Accounting, bookkeeping and invoicing software can dramatically improve your financial management by:
- Automating routine tasks
- Providing real-time financial insights
- Simplifying tax calculations and submissions
- Managing invoices and payments efficiently
- Generating financial reports
5. PLAN FOR TAX OBLIGATIONS
Did you know HMRC statistics show that late payment penalties cost UK small businesses over £600 million annually?!? That’s a lot of money that could be put to use by small business owners and their families.
Setting aside money for tax payments isn’t optional – it’s essential for your business’s survival and will save you a lot of stress and worry.
One of the easiest ways to start saving, is to create a dedicated tax savings account and aim to set aside:
- 20-30% of income for Income Tax and National Insurance
- 20% of sales for VAT (if VAT registered)
- Regular Corporation Tax payments (for limited companies)
Some business bank accounts also offer saving spaces that can be used instead of a savings account, just make sure you don’t keep dipping into it when cash runs a little short.
If you’re new to allocating money for different business needs, author and entrepreneur Mike Michalowicz has some interesting and unusual tips with his book and method ‘Profit First’.
ARE THESE TIPS APPLICABLE TO YOUR BUSINESS?
While these tips can benefit any business, they’re particularly important for:
Sole traders managing variable income
Small business owners with multiple expenses
Freelancers dealing with irregular payment schedules
Growing businesses dealing with increasingly complex finances
THE BOTTOM LINE
Good budget management isn’t just about tracking expenses – it’s about creating a clear financial roadmap for your business that helps you make informed decisions and maintain healthy cash flow. Taking the time to take care of your money, isn’t a waste of time it can bring a wealth of benefits not only for your business but also your own health by reducing stress and anxiety.
Need help implementing these tips? Consider consulting with a qualified accountant or financial advisor who can provide guidance specific to your business situation.
And for all your invoicing needs, we can help you by streamlining your invoicing to help you get paid more quickly and easily and the first 30 days are on us for FREE.
