Now, it’s a well-known fact that most small businesses fail, not because they don’t have a good idea or a passionate owner, but because they don’t manage the financials.
In other words, businesses fail for financial reasons, not for product reasons. I’ve talked about the importance of writing a business plan in one of my earlier episodes, and what I will do is put a link in the description below so that you can check that one out later if you haven’t already.
I’ve also talked before about how you can improve your cash flow so that you don’t run out of the money that you need to trade successfully. So I’ll pop that on there as well so you can watch that video.
Today, however, I wanted to talk about the nuts and bolts of really running the financial side of your business.
So the day to day, week to week accounting that you need to be thinking about.
Now, some people love the financial side of being an entrepreneur, but many of you don’t. In fact, it can be an area that a lot of people vigorously avoid having to deal with, preferring to be out there selling or managing their staff or innovating new products, the stuff that I always say is like the sexy stuff, right? But whether you love running the numbers or not, it is a job that needs doing.
When you start out in business, the chances are that you won’t have an accounting department keeping an eye on your bank balances or raising your invoices, let alone chasing outstanding invoices. So whether you like it or not, it’s more than likely that you’re going to have to get involved.
Now, managing your account used to mean sitting down with your bank statements, checking off your income and expenditure, checking all your invoices are raised and chasing up your payments. But over the past few years, almost everything that you need to do has moved online and together with software like Intuit or Sage or QuickBooks, they can keep an eye on your accounts and it has become a lot easier.
I’m not going to recommend any particular accounting software because it depends on the business that you run and your own personal preferences but what I will say is that whatever you choose, you need to be capable of some key tasks underpinning the work that it does.
Number one is your basic accounts, this is where you can keep an eye on all of your financial transactions.
This is more than just looking at your bank statement, it’s about what invoices you’ve raised, when they’re due to be paid and what bills you have to pay.
It’s also about being able to identify any overdue invoices or seeing things that might have turned into bad debt.
Then number two, you have financial reports.
Financial reports look at more than cash in and cash out, it’s about what profit or loss you’re making along the way. Now, it’s really important to know if what you are doing is making profit or not because while the cash in the bank might look healthy, it can sometimes give a false picture of that success.
The third area that you need to manage is taxation.
It is your responsibility to make sure that you make provisions for tax and you pay it when it’s due. If you’re self-employed, then it’s going to be your personal tax but if you have a company, it’s probably going to be both corporation tax and personal tax.
Now, this is where some professional tax advice can come in really handy. When you work for someone else, your tax will usually be deducted every week or month straight from your wages but that all changes when you become self-employed or when you start your own company.
Not only will the tax be payable on specific dates within the year, but the rates of taxation will vary. The good news is that you will be able to offset things like expenses against your profits, which is going to reduce your tax bill.
Now, not getting taxation advice is false economy, and it can prove really costly if you get it wrong so I want you to make sure that you surround yourself with the right people if you need some support there.
Rules and regulations on tax and accounting vary around the world so I can’t talk in any detail, but for those of you watching in the UK, there are some rules that you really need to know about.
First of all, if you’re a sole trader, you will need to be registered with HMRC and file self-assessment tax returns. You’ll also need to keep accurate records of income and expenses and this is where some of the tax and accounting apps can really help you if you need to.
Now, if you set up a limited company, then that company must prepare annual accounts and these must be filed electronically with Companies House, which is where members of the public can go and view them. They must be filed by the specific dates and the company has to pay tax on its profits.
If you’re a partnership, then each person needs to file their share of the profits in their individual tax returns and pay their individual tax as well.
All of this might sound really complicated, but as I mentioned before, a couple of hours talking to an accountant should really put you on the right track and make sure that your business is set up in the right way. The other great thing about that is they’ll also be able to tell you about what taxes you will have to pay and when you will have to pay them.
So, to summarise…
Keep accurate up-to-date records of all of your financial transactions. Secondly, choose some accounting software which will then be able to save you time and provide you with the financial reports that you need. Thirdly, monitor your cashflow carefully, so that’s your money in, your money out, to ensure that the business has enough money to meet its obligations, paying its bills and its taxes.
Then, I want you to get professional guidance and support, especially within tax laws, and send your tax returns and any payments in on time or you could be subject to fines and penalties.
When it comes to day-to-day accounting, the thing to remember is the more organised you are, the less time that you will need to spend doing it, which in turn gives you more time to run your business.
Winner, winner, chicken dinner!