When you run your small business, you’re probably wearing a number of hats and juggling lots of plates. That makes it tempting to let some tasks slide, especially tasks that are related to your business finances, which can be challenging and often outside your skill set.
Here’s our top tips for managing your business finances, so you can have the best chance of success.
Pay yourself
As a small business owner you may be tempted to keep putting every cent you earn back into your business, but it’s important to pay yourself as well. You need to pay your own bills and be in a good financial position personally. And don’t forget about putting money aside for retirement – no matter how far in the future that may be!
Of course, the way in which you pay yourself will be different depending on your business structure. It’s best to have a conversation with your accountant about the best way you should be paid by the business for your efforts. Ultimately though, you should be paid – otherwise, what’s the point?!
Recommendation: Draw a regular income from your business that you use to take care of your personal expenses and retirement planning.
Have a separate business bank account
Keeping your personal and business finances together makes it more difficult to track how your business is doing, and how you’re doing. When you have separate bank accounts for your business and personal finances you can more easily monitor where and how you’re spending money. Finally, it makes things easier to track for tax purposes and takes less time for your bookkeeper to reconcile your accounts!
Recommendation: Have separate accounts for your business and for your personal finances and deposit your salary (see the above tip) into your personal account.
Have a good invoicing and collection strategy
When you own a business you’ll deal with clients who are slow to pay their bills. Getting your invoices out quickly is the first step. If you have a large project that spans a number of weeks or even months, you could consider progress or milestones invoices so you’re paid for the parts of the project you’ve completed – if you’ve ever built a house, you’ll be familiar with this concept! For smaller or one-off jobs, what’s your invoicing policy? Invoice before the job commences, or on conclusion? Who is responsible for the invoicing? What information do you need to effectively invoice? Who should the invoice be sent to – ie. the person responsible for payment. All of this should be considered when developing your invoicing policy.
Sending your invoice is great, but that’s not money in your bank yet! Monitor your outstanding invoices to see which clients pay you on time and who takes their time paying your invoices. If you have too much money tied up in unpaid invoices, you may need to adjust your payment policies.
Consider offering additional ways to pay – your client may be a slow payer because you’re only offering one payment option and it’s not convenient for them. You can offer a number of payment options directly in Xero – pay to your bank account, pay via Stripe, GoCardless or Paypal. All of these options are quick and easy to set up in Xero and offering multiple convenient ways for your clients to pay you usually means money in your account quicker.
Sometimes even with the best invoicing policy and multiple ways to pay, some clients are just slow or don’t pay. So it’s important to continue to follow up – otherwise you’ve done the work for free! And don’t be afraid to refer to a collection agency if you need to.
Recommendation: Develop your invoicing policy, establish additional payment options, invoice quickly, chase up late payments, refer to a collection agency if necessary.
Keep your Tax Invoices and receipts
Now that there are digital platforms for managing the financial aspects of your business, you don’t have to have physical receipts taking up space in your office. Or your glovebox, or wherever else you may shove them… Instead, you can go paperless, and keep all your receipts digitally. We recommend setting up Hubdoc and integrating with your Xero account – it’s already part of your Xero subscription, so you may as well be using it! This provides an electronic copy of the document which can be published through to Xero as a bill with the document attached.
It’s important to keep your Tax Invoices and receipts (we call them source documents) for a number of reasons, first of which is for validation purposes by the Australian Taxation Office (ATO). Also, it’s helpful for your bookkeeper to see source documents so we can correctly identify and classify expenses. And GST isn’t a straight 10% on everything so often it’s important for us to sight the Tax Invoice so we can accurately record the GST. If we can’t correctly identify and ABN and GST status, we can’t claim GST – so that’s potentially money in the ATO’s account when it could be in yours!
Recommendation: Set up Hubdoc, integrate with Xero, send all your receipts to Hubdoc to ensure they’re classified correctly and attached to the transaction in Xero.
Have a budget
Your budget is your plan for success. It shows how much money you expect to bring in and how much you might spend in a given period. You can anticipate times when your profits may be higher and times when you may have a surge in your expenses. Additionally, bankers, investors, and other stakeholders may ask for a budget when they consider financing your business.
When creating a budget, look at your historical data to give you an indication of past trends. And then forecast the future based on what you know is coming up in your business, market trends, and sometimes even global factors. It’s not an exact science and sometimes unexpected things pop up that you couldn’t foresee. Don’t worry, it’s doesn’t have to be set in stone and can be adjusted as your situation changes.
Once you’ve created your budget, load it into Xero and then monitor it. That means when you run your Profit & Loss each month, compare it to your budget. Are you on track? If not, why? It’s okay if you’re off track, but important to know why so you can make adjustments if you need to.
Recommendation: Create a budget, load into Xero, monitor monthly. Use the Budget Calculator on our website to get you started.
Have some reserves
Sometimes unexpected things pop up that you can’t foresee – COVID is a perfect example of this. Luckily a global pandemic is rare and hopefully we won’t ever have to deal with something like that again! Other unexpected expenses could be a breakdown of plant or equipment, or a key person leaving your business, or the loss of a large client. These are unexpected and can often lead to financial stress in the business. So while you’re working to fix the problem, you may have more cash that you need to pay out, or your incoming cash may slow down. This is why it’s important to have some cash reserves.
One of our favourite books is Profit First. It uses the concept of having different buckets of cash. You don’t need to follow the system perfectly, but if you adopt their overall strategy, and are diligent about putting money aside on a regular basis (weekly or monthly), then when something unexpected does happen, you only need to deal with the “thing”, and not worry about the cash flow.
We also recommend using a separate bank for your reserves. This means you can’t accidentally dip into your reserves for everyday expenses.
Recommendation: Set up some bank accounts for your reserves, identify the amount or percentage of revenue you’re going to put aside, work out the frequency you’re going to transfer into your reserve accounts, sit back and watch your reserves grow.
Final thoughts on managing your business finances
There are other strategies that can help you run your business and set yourself up for financial success. Those include automating your bill payments, having a cash flow statement, and choosing the right business structure for you. But as a place to start, creating a budget, keeping your source documents, having an invoicing and collection strategy and drawing a salary that you keep in a separate bank account are important first steps.
Want to learn more about how we can help you stay on top of your finances and help you eradicate financial stress? Contact us to learn more.
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