Maintaining the financial side of a business can be a delicate balancing act, no matter how great your products or services are. Even in businesses with a high volume of sales, lack of financial management could see you end up with a serious cash flow problem. If you don’t know where you stand with exactly how much money comes in and goes out, it’s all too easy to overspend.
Putting a decent process in place to help you manage your finances is not as hard as you may think. We’re here to help with some tips to get you on track, so you know where your business stands.
Maintain good bookkeeping records
The first step towards getting your financial data in check is ensuring you record everything in your bookkeeping. Every transaction in your business, such as the invoices you send and receive, expenses you incur, and bank transactions, should be accounted for.
How often should I review my business’s financial records?
Every business is different, so an organisation with very few transactions may be fine reviewing its financial records on a quarterly basis, while others could benefit from looking at them more frequently. Using this information can help you to analyse what’s really happening in your business, so you can take steps to make it more efficient. We’ll include some examples below.
Managing your finances helps you avoid overspending
You’ve just been paid by a customer, and now your business account has £10,000 sitting in it. Hurrah! But – before you scamper off to buy the new equipment you’ve had your eye on – do you have any upcoming bills that need paying first? Are you putting money away to pay for general running costs? Do you need to reorder any other supplies?
If you’ve been keeping your accounts up to date, your financial records should be able to tell you this. It can also help you monitor regular spending too, so you can take a look at your outgoings and decide what’s essential, and what isn’t.
It can help you claim tax relief you’re entitled to
Some costs are unavoidable, but it’s worth remembering you can claim tax relief on any expenses incurred wholly and exclusively for business. These can be pretty much anything, even down to the props you might need to buy for a social media campaign.
Businesses pay tax on their profits, so deducting expenses from your income reduces your overall profit, which means you save money on Corporation Tax if you’re a limited company, or income tax as a sole trader.
It can help minimise the risk of penalties
HMRC aren’t afraid to issue penalty notices if you miss the deadline for submitting your tax return. Managing your financial records makes it easier to keep track of what your tax bill will look like, and minimises the risk of sending late or inaccurate tax returns. Plus you’ll be able to put money aside to pay the bill – which is also useful!
Helps you keep on top of outstanding payments
Regularly reviewing your financial reports means you’ll know how many outstanding invoices you have waiting to be paid, so you’ll be able to chase up those errant customers more effectively.
It’s also helpful for planning, so you can predict what funds your business can realistically expect to receive (and which customers don’t need another phone call!).
How do I review my business finances?
Using a variety of financial reports helps you to look at different elements of your business, giving you a more complete picture of what’s happening in each area. Each report will show you something different, which we’ll explain below.
| Type of Financial Report | What it Shows |
| Balance sheet | Your balance sheet shows you a snapshot of your business’s financial health at a specific point in time. It will normally include a summary of your assets, liabilities, and equity in the business. |
| Profit and loss statement | Also known as an income statement, these look at your total earnings, profits, and expenses over a specific period of time. It’s great for calculating whether your business is profitable, as it allows you to compare your total income against your total expenses. |
| Cash flow statement | Cash flow refers to funds that move in and out of your business. Managing your cash flow correctly helps you make sure there are funds available to pay your bills on time. If you find you aren’t making payments on time, analysing your cash flow statements will help find the cause of the issue. It could be down to overspending, or clients simply aren’t paying their invoices. |
How can my financial records help me be more tax-efficient?
Finding ways to be more tax-efficient should be top of your list when you’re looking to cut tax costs, so it’s just as well your accounts have all the answers – once you know what to look for. For example:
- What do your profits look like on a regular basis? A sole trader with a high income might find it useful to reassess their business structure and find it more tax efficient to operate as a limited company.
- Already running a limited company? If you’re a director, are you paying yourself in the most tax-efficient way?
- Are you claiming all of your allowable expenses and reliefs? We’ve already touched on this – but track your expenses! You can deduct expenses from your profits, meaning there’s less tax to pay.
- Could you pay money into a tax efficient savings or pension scheme, rather than building up an used surplus of cash in the business?
- Did you start your business as a side-hustle? Reviewing your business accounts will help you assess if the time is right to make the big step from side-project to self-employment.
The options are endless!
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