Running a small business isn’t easy. Most people start their own venture because they want independence, to pursue a dream, or to create a better life for their family.
But the reality is many end up struggling financially. Figures from the Office for National Statistics show more than 60% of small businesses fail within five years of starting.
It is possible to survive and thrive though, and the development of prevention strategies can help protect small companies.
It may seem a strange place to start, but many small business owners neglect to pay themselves while concentrating on growing their company.
Maintaining healthy personal finances, as well as business ones, is vital. While it may be tempting to put every extra pound into a business, overlooking personal financial health can lead to personal troubles and burnout.
When thinking about what to pay themselves, small business owners should consider:
By balancing their personal needs with that of the business, owners can ensure they have the funds they need to cover all aspects of their life whenever they need them.
When thinking about personal and business finances, it is also important to ensure they are kept separate. Paying for personal things out of a business account can create tax issues or simply make compiling accounts far more complicated.
Creating a budget which includes all your income and expenses will allow small business owners to build a picture of their finances that will allow them to put money aside for any debts.
Budgeting allows small companies to plan for those months where they may be bringing in greater or lower levels of income, or when they have increased expenses. By doing this, money can be kept aside for any moments when cash flow is lower.
Any budget should be regularly reviewed and adjusted based on business performance. Such financial planning and management is key for both endurance and growth.
Having a budget is like creating a map for a business’ money, making planning easier and helping small companies to spend money more wisely.
Establishing an emergency fund will help businesses remain sustainable in difficult periods.
Many business accounts will allow for money to be set aside into a separate fund – ready for those unexpected expenses or for when the tax man comes calling.
Getting invoices out to customers promptly and putting processes in place to track payments and chase any which become overdue can have a huge impact on cashflow.
Creating invoices and chasing payments can be a time-consuming and frustrating part of running a small business, but it can make all the difference. Many bank accounts and accounting tools come with features which streamline this process by automatically sending or chasing invoices, and pushing out notifications when payments are made.
Another way to tackle late payments is by asking for payment upfront or giving a discount for early payments.
Examining other sources of revenue and having multiple clients allows small companies to avoid become overly reliant on a single income source or contract. This could lead to opportunities for expansion or new products.
Having a diverse client base means you avoid the risk of one customer taking up all your time. There is also the danger that a single client could suddenly end a contract or reduce the level of services or products they are purchasing, creating substantial financial risk.
Furthermore, having a single client can open you to implications under IR35, as you may be deemed to be an employee for tax purposes meaning you will be taxed on a Pay As You Earn basis.
Small businesses will need to be aware of their tax obligations. In the world of work, people become used to the PAYE system, where tax and national insurance is automatically taken from their wages.
This is not the case for those who are self-employed, with HMRC taking tax payments twice a year in January and July. It is important to make sure tax returns are submitted promptly, and any payments made on time. HMRC will issue fines for late payments, so small companies need to be on top of any tax they owe.
Small companies should also cover themselves with the correct insurances. From public liability and professional indemnity to legal protection, the correct insurance policy protects businesses from unexpected costs.
You will probably also want to look into personal accident insurance. If you are injured in any way and unable to work for any period of time, this cover can be make or break for your business. Meanwhile, legal protection insurance includes jury service cover meaning you will still get paid if you have to take time off to do your civic duty.
When embarking on a new business venture, the last thing many owners want to think about is spreadsheets, budgets, HMRC, and insurance.
But without taking time to carefully chart their financial future, they are risking joining the ranks of those businesses which fail within the first few years of operation.
The good news is that by following a few simply steps, thinking about when they will need money to cover payments and when is a good time to invest, and making sure to remember their own personal needs, small business owners can chart a route through most financial challenges.
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