As exciting as entrepreneurship can be, you will always need to be prepared for tomorrow. And when it comes to finance, it's important to be extra careful especially as you’ll most likely be running your business with limited financial resources.
Navigating through these financial aspects can sometimes feel like a rollercoaster ride.
But, don't worry! With the right tips and tricks up your sleeve, you can steer your business clearly by making sound financial decisions - big and small! So, let's explore all the essentials such as small business finance, financial forecasting, tax planning, and risk management to name a few.
What is Financial Planning for Small Businesses?
You’re probably sick of being told that you need to do things like analyse, organise and manage your financial resources and activities to make sure your cash flows are in check. In other words: to do good financial planning - this simply means managing your finances in a way that allows you to have enough money to reinvest and grow your business.
The process involves creating a roadmap for the business's financial future by laying down your financial aims, developing strategies to achieve the set goals and of course, you also need to monitor and adjust your plan as needed. Financial planning works from different angles, including budgeting, cash flow management, financial forecasting, tax planning, investment planning and risk management.
When you know the state of your financial affairs back to front, you are technically preparing yourself to allocate resources effectively, minimise financial harm and optimise your company's financial performance.
But that's not everything. Effective financial planning goes beyond this:
It gives you a roadmap by setting specific objectives like making more profit, reducing debt or growing your operations.
The benefits of good financial planning
- You can smartly use your money to invest and get the best for your buck
- It helps to keep your money on track and ensure that you have enough in the bank to cover expenses, pay employees and take profits home
- From pricing your products to developing new ones, you can have all the financial facts in hand to make sound decisions.
- If you don't enjoy managing taxes, the good news is that financial planning helps you to keep your taxes sorted This way you can get eligible deductions and credits and keep your tax bill as low as possible.
How to Set Your Financial Goals
Clear and measurable goals provide a roadmap for your business and help guide your financial decisions. Here are some steps to set effective financial goals:
Identify your business objectives:
Begin by understanding the general objective of your business. Ask yourself what you want to achieve for the short term and long haul. It might be that you want to increase your sales, venture into new business sectors, improve profitability or reduce costs. By aligning your financial goals with your business objectives, you can ensure that your finances support your overall vision.
Make your goals very specific!
When we say this, we mean that you need to be very specific with your funds. The adage "If you fail to plan, you are planning to fail" is specifically true when it comes to setting your goals. At a minimum, you need to set measurable goals to track your progress and determine where you "actually stand" when you go back to your goals. For example, rather than saying you want to increase revenue, specify that you want to increase revenue by a certain percentage or reach a specific sales target.
Set realistic and attainable goals
While it's a good idea to aim high, it's equally important to stick to reality. Consider factors like your business's current financial and economic situation, and industry trend. Setting impossible goals can lead to disappointment and frustration, while reasonable goals will keep you engaged and motivated.
Define a timeframe
A sense of urgency often helps you to stay motivated and work more efficiently. Assign a timeframe to each financial goal to create a sense of urgency and establish a deadline - this can help you to stay responsible and keep tabs on your progress.
Break Goals Down into Actionable Steps
When you have your financial goals in place, separate them into smaller, actionable ones. This makes them more sensible and helps you to actually keep tabs on your progress more. Each step should have a reasonable game plan and a timeline for completion.
Create a Budget to Track Income and Expenses
Creating a budget is essential for tracking your small business's income and expenses. Here's how to do it:
Assess Your Current Financial Situation
Begin by reviewing your income sources and existing costs. Start gathering all your financial records and statements to get a reasonable picture of your company's financial health.
Categorise Your Income and Expenses
Split your income and costs into relevant categories, like: sales revenue, operating costs, employee salaries, marketing expenses etc. This allows for better organisation and analysis.
Set Realistic Revenue and Expense Targets
You know your business better than anyone else. So, it's easier for you to fix revenue and expense targets to plot your profits. Now, follow these figures to make proactive decisions, set limits and jot down possible areas of cost reductions. If you want to know how to create realistic budgets, here’s how you do it!
Track Income and Expenses Regularly
This is an obvious practice that can keep you in the game for a long time. Monitor your cash flows on a regular basis - which means keeping a record of all your transactions and modifying your budget accordingly. Now if you are too busy to do that, you can always get an expert to help you, if it will save you time it will probably also save you money in the long run.
Follow the save and spend strategy
Continuously look for opportunities to reduce costs and areas to invest without compromising the quality of your products or services. Negotiate better deals with suppliers, explore alternative vendors, or consider outsourcing non-core tasks.
Review and Revise Regularly
Review your budget periodically to account for any changes in your business environment or financial circumstances. Make adjustments as necessary to ensure your budget remains realistic and aligned with your goals. One method would be to have different sub-accounts for different types of expenditures. If you need solutions like this, you can check out wamo's multicurrency business accounts and see if it's a fit for you.
Financial Forecasting for Future Revenues
Your financial documents are super important for small businesses. They serve multiple purposes like tracking your cash flows, showing your investors that your business is genuine, and helping you make smart decisions. By staying on top of your financial planning and forecasting, you can uncover the issues before they turn into headaches. So, don't neglect these financial documents—they're your secret weapon for success! Typically, your financial planning and forecasting documents include:
- Balance sheet: This document gives you a snapshot of your business's financial standing. It shows what you own (assets), what you owe (liabilities), and how much you've invested (equity). It helps you understand your business's net worth and shows if you're on solid financial ground. It also gives banks and investors a clear picture of your business's financing.
- Profit and loss statement: This statement summarises your business's revenues and expenses over a period, usually a year. It tells you if you made a profit or a loss. By keeping track of your profits over time, you can see how well your business is doing. You can also create projections for the future based on different scenarios, which helps you make decisions about investing or cutting costs.
- Cash Flow statement: This document is all about tracking the money coming in and going out of your business. It helps you ensure you have enough cash to cover your day-to-day operations and spot any potential issues before they become big problems. It's like a financial health check for your business.
- Break Even analysis: This analysis helps you figure out the point at which your sales or revenue covers all your costs. It's important because if your business consistently fails to break even, it may not be financially sustainable. By calculating the breakeven point, you can evaluate your pricing, and costs, and decide if expanding or starting new projects is a good idea.
These four financial planning and forecasting documents are essential for small business owners. They provide a clear picture of your business's financial health, help you make informed decisions, and ensure you're on the right track to success
Tax Planning Strategies for Small Business Owners
Tax planning is crucial for small business owners to optimise their tax liabilities and maximise their financial resources. Here are some tax planning strategies to consider:
Know the tax rules: Get familiar with the tax laws that apply to your business. Sort out what you want to pay, when is the deadline for the same, and whether there are any sweet allowances or credits you can claim.
Keep your records straight: Stay in constant touch with your financial records—income, expenses, receipts, and so on. Good records make it simple to prove your deductions and show your standing during audits.
Sort your expenses: Put your expenses in the right buckets to claim the right deductions. If you're not sure, talk to an expert to ensure that you're doing it right and getting all the deductions you're entitled to.
Grab those deductions and credits: Hunt around for relevant deductions and credits which apply to your business. Think home office expenses, equipment buys, business travel, or research and development. Just make sure you meet the requirements and keep the paperwork handy.
Think about your business structure: Explore all your options and take a calculative approach after understanding how different business structures (like sole proprietorship, partnership, LLC, or corporation) affect your taxes. Each structure has its pros and cons. Talk to a tax advisor to figure out which one saves more money in your pocket.
Be ready for estimated taxes: Estimate how much tax you owe for the year and make quarterly payments to avoid penalties. Keep an eye on your income and expenses so you can plan and pay accurately.
Time it right: Strategically time the recognition of income and the payment of expenses to optimise your tax liability. Accelerating or deferring income and expenses into different tax years can help manage your taxable income.
Investment Planning for Small Businesses in the UK
Investment planning is a key aspect of financial management for small businesses in the UK. Here are some tips to help you make informed investment decisions:
What's your risk type?
Think about how much risk you are comfortable with! Figure out your business' stability, how long you are willing to invest and what feels right for your business. It's very important to analyse every minor aspect of an investment before putting in your hard money.
Mix it up!
You know the good old saying: "Don't put all your eggs in one basket”. So here's a rule of thumb - spread your investments across different types of assets, industries and places. Diversifying keeps you from putting too much on the line and gives you more chances of good returns.
Do your homework
Before you invest, do thorough research. Stay on top of what's happening in the market, watch out for economic shifts and keep an eye on any new rules.
Save on taxes
Look into investments that can help you save on taxes. Individual Savings Accounts (ISAs) and pensions are worth exploring. They offer tax advantages that can make a real difference in how much you get to keep.
Think long term
Don't get caught up in short-term ups and downs. Think about the potential growth associated with that investment, the stability offered over the long haul and how beneficial an addition it is to your portfolio.
Keep an Eye on Things
Regularly check on your investments. See how they're performing and make adjustments if needed. Stay informed about any changes that could affect their value.
Seek Professional Advice
Consider consulting with a financial advisor or investment professional who specialises in small business investments. Their expertise can help you make informed decisions, navigate complex investment landscapes, and manage your portfolio effectively.
Risk Management Strategies for Small Businesses
If you’re thinking your business comes with no risk - well, you’ve probably hit a blindspot! It's almost impossible to run a business with zero risk. But, on the brighter side, you can always keep yourself geared up to deal with these pesky risks. Here's how to do that.
Spot the risks
Take a good look at your business and figure out what could go wrong. This means you need to think about all the internal and external factors that could mess up your business (like your money or operations) or external factors like the market, laws or competition.
Prioritise the biggies
Focus on big risks that can have a major impact on your business. Rank them based on how likely they might occur and what could be the possible damage out of it. Once you have that mapped out, you know exactly where to put your money and resources.
Plan it out!
Get your risk management plan down on paper. This means that you need to outline how you will spot them and what ways you can handle them.
Keep an eye
Put internal controls and procedures to lower your risks and stay on the right side of the rules. Split up the tasks, do mandatory money checks, manage your inventory and beef up your cybersecurity to protect sensitive info.
Teach your team
Give your employees a little rundown of potential risks and how to deal with these surprises. Make sure everyone knows what to look out for and how to handle it. Create a culture where risk awareness is a priority and keep everyone involved in the mitigation plan!
Cover your back
You see, business risks show up on your door unannounced - and even if you have a strong plan in place, it can still cause unexpected damage to your business. In such a case, get yourself and your business covered through insurance. Think about general liability, property insurance, fire insurance etc that can keep you relaxed when you leave your work.
Keep Your Data Safe
Don't forget about your data. Back it up regularly and put strong security measures in place. Keep your software up to date, use smart passwords, and teach your team how to stay safe online.
Choose Reliable Partners
Make sure your suppliers and vendors have their own risk management game on point. Check them out and build relationships with backup options, so you're prepared if something goes wrong in your supply chain.
So, we hope this guide helps you to keep your financial health in check. It's quite important for business owners to stay educated about their own money. After all, it's the only thing that will keep your business afloat in the long run. If your business wishes to survive the past five-year point - when 50% of UK small businesses already fizzle - then a financial strategy is a fundamental part of your business plan.
What are the most important financial planning tips for small businesses?
The most important financial planning tips for small businesses are setting clear financial goals, creating a budget, monitoring cash flow, making informed decisions, planning for taxes, and managing financial risks. Setting clear goals provides direction, while a budget helps track income and expenses. Monitoring cash flow ensures there is enough liquidity for daily operations. Making informed decisions based on accurate financial information is crucial. Proper tax planning optimises tax strategies and minimises liabilities. Managing financial risks involves assessing and mitigating potential risks. By following these tips, small businesses can enhance their financial planning and achieve greater success.
How can small businesses improve their cash flow?
Small businesses can improve their cash flow by implementing strategies such as invoicing promptly and following up on overdue payments. Managing expenses by reducing costs and negotiating better terms with suppliers can also help. Offering discounts for early payments or implementing late payment penalties can incentivize customers to pay on time. Additionally, monitoring inventory levels, optimising pricing strategies, and exploring financing options can contribute to better cash flow management. Regularly reviewing and adjusting your cash flow forecast can help you stay on top of your finances and make informed decisions.
What are some common financial mistakes that small businesses should avoid?
Some common financial mistakes that small businesses should avoid include neglecting financial planning, poor cash flow management, overlooking proper bookkeeping and record-keeping, failing to separate personal and business finances, and neglecting tax obligations. Financial planning is crucial for setting goals and making informed decisions. Proper cash flow management ensures the business has enough liquidity. Accurate bookkeeping and record-keeping help track income and expenses. Separating personal and business finances maintains clarity and avoids complications. Fulfilling tax obligations on time prevents penalties and legal issues. Avoiding these mistakes can contribute to the financial health and success of a small business.