Financial Planning Tips for Small Business Owners

© ANDREI ASKIRKA / Shutterstock.com

Planning is important for every small business owner because it gives you more control over your future. While it’s impossible to foresee everything that might happen, careful cashflow management can help to alleviate some of the stress, providing advance warning of potential crises on the horizon.

Something as important as your finances should be given the necessary attention as a matter of urgency, yet only 54% of entrepreneurs understand financial management when they launch their new venture.

According to studies, even when the company is up and running, 28% of small business owners admit to “lacking confidence” in their own financial knowledge. Almost one-third said they could improve their budgeting and cashflow if they had improved financial literacy, while 19% would understand their taxes better with greater knowledge.

Why is financial planning important?

In the world of small business management, financial planning is the key to the stability and growth of your enterprise. It’s far more than simply number crunching: a good strategy can help you reach business goals and avoid disasters.

Every pound spent should be a step nearer to reaching your business goals. Determining your budget allocation for marketing, human resources, production costs and other financial considerations is one of the most important things you’ll ever do.

However, financial planning can be challenging for small businesses, as it’s one of many day-to-day tasks that must be completed.

Research shows nine out of ten SMEs use the services of a professional small business accountant at some point, either on a regular basis, or to help them out at certain times. A massive 98% say it has “boosted their confidence” and 90% feel it has helped their business to grow and increased their success.

Business owners who have never used an accountant have expressed fears they may not pass a financial audit and are less likely to feel their company has strong financial health.

Financial planning is a compass to guide your enterprise through today’s uncertain market, enabling you to effectively manage cashflow and make informed decisions.

Keep business and personal finances separate

A common mistake among new entrepreneurs is mixing business and personal finances, according to research published by Forbes. Although it can seem tempting to have just one bank account to streamline operations, it can also lead to confusion and disaster.

It can leave you on thin ice legally, as you may end up personally responsible for any company debts in the event of problems. This could lead to personal assets, such as your home, being at risk in the event of the business failing.

Create a realistic budget

Unless you have a clear idea of your income and expenditure and can assess your business’s financial health honestly, there’s no point in having a budget. It will become almost impossible to hit targets, as an accurate budget is the key to the success of your organisation.

A budget needs to begin with a list of every source of income and every expense you encounter. This includes everything from rent and utility bills to office supplies, marketing costs, maintenance and everything in between.

It’s also prudent to try and have something in the pot as an emergency fund to account for unexpected costs. If you don’t have a realistic idea of your costs and income, it’s pointless setting a budget.

Monitor cashflow continually

Keeping on top of cashflow is the lifeblood of your business. If you struggle with management, it doesn’t take long for the company to start struggling.

Even more damaging is when you don’t realise there’s a problem because you’re not keeping track of finances accurately. Did you know 82% of small businesses that fail have cited bad cashflow management as a major contributory factor?

Take steps to ensure a healthy bank balance by invoicing clients promptly and following up on overdue payments within a reasonable timeframe. Never let things slide under any circumstances.

Continually negotiate with your suppliers to ensure you have favourable payment terms and always try to keep adding to a cash reserve for an unforeseen emergency. If your business has seasonal fluctuations, you’ll be relieved that you kept something in reserve.

Pay yourself a wage

This may seem odd when you actually own the business, but it’s always important to receive an actual wage yourself. It should be included in your budget, as would be the case when paying an employee.

Set yourself a low salary initially and plough as much capital as possible into growing your business. It’s a useful yardstick to measure how your enterprise is growing, as you should be able to gradually increase your own salary over time.

Start by paying enough to cover the National Insurance threshold, as this will then mean your salary is tax-free. When you don’t set yourself a wage, this makes it harder to keep the budget on track, as you will be dipping into company funds for your own living expenses and may lose track of how much you’re spending.

Financial planning as a small business owner need not be a minefield if you handle it methodically and enlist the services of a professional accountant if you don’t feel confident enough to balance the books yourself.