A personal blog about life, business and money – not to be regarded as Financial Advice
As business owners, we have SO much think about. Doing the marketing, making the sales, finding the right staff (or freelancers), managing the suppliers – let alone doing the actual work.
And yes, we went into business to help people and provide a valuable service.
But we need to make money!
The challenge is always that spending so much time working IN the business doesn’t leave us much time to work ON it.
We all need to create ‘CEO time’ to look at our direction and plan our strategy – but also to focus on the money you need, to help make your vision a reality.
31st December is the second most popular year-end date for accounting purposes (after the 5th April). And as the year comes to an end, most of us begin thinking about what we want to achieve next year.
So to get 2020 off to a flying start – let’s take a deeper look at what’s happened with your money this year.
- How much did your business turn over this year?
- How much did you spend?
- What did you manage to take as salary / drawings?
I know this might sound simple – but I also know that with so much going on, it’s usually best to start right at the beginning.
Take time to (properly) review your spending. It’s an excellent way to understand EXACTLY where your money goes each month – to see if you’re control of your money, or if it is in control of you.
Even if your business is earning good money, it can often feel like the cash just never seems to be in the right place at the right time. There’s nothing more stressful than cashflow headaches (which make it so hard to live your best life).
I truly believe that happiness is for NOW and not a dream for a distant future. Being in control of your finances plays a huge part in this.
When you get your money to work for you, you can fill your life with the experiences and things that matter to you. You can spend more time with the people you love, doing what you love.
But it can feel overwhelming. So where do you start?
Here’s my 5 top tips, to help you get the MOST out of the money that you have:
1. Know your numbers.
It’s essential you know exactly how much money you have coming in and out of your business each month. So you can plan, grow and avoid the pitfalls faced by many business owners.
This doesn’t have to be complicated – just write down EVERYTHING that comes in and goes out. You can use spreadsheets or accounting software like Xero or Quickbooks. But honestly, a piece of paper will do the job just fine!
Start by listing out:
- All your income, from ALL sources in your business – regular, from contracts and/or ad-hoc work. Is any of it predictable?
- All your outgoings – rent / wages / internet / memberships etc.
Regular payments are usually top of mind, but it’s easy to overlook to one-off things (like annual technology subscriptions renewing or the cost of thank-you gifts you send to clients at Christmas). Go back over your bank statements for the last 12 months and check you’ve not missed anything.
Now you’ve got everything written down, deduct your fixed operating expenses – like rent / staff costs / materials – from your income. This then gives you a figure that you can spend on YOUR wages and any other discretionary spending.
Take out your salary next – and only spend what is left on your marketing / Facebook ads / a new laptop / networking events etc. That way, you make sure that YOU get paid!
And then keep reviewing your spending every 3-6 months. Not only will this help you check that you’re not spending more than you bring in, but it’ll also alert you the things you pay for but never use (which have a tendency to creep up on us and can really rack up!).
2. Pay yourself a fixed salary every month.
When we start our own business, the biggest change for most of us is managing the irregular income. You could earn £800 today, nothing tomorrow, £50 the day after and then in 3 weeks, £3,000 comes in.
How are you meant to budget for your bills with that?
One key thing here is to have a separate account for your business. If you’re a sole trader or partnership, this can be a ‘normal’ personal bank account.
So if you don’t already have a dedicated business account, either open a new one – or dig out the paperwork for an existing account that’s been sitting there for years with £4 in it, but you’ve never got round to closing.
If you have a Limited company, you’ll need to open a dedicated business account – although I’m sure you already know this – because your company is a separate legal entity to you, even if you are the only director / shareholder.
Once you have your dedicated business account, set up a standing order for a fixed amount of salary to your personal bank account, EVERY month.
The main thing here is consistency. It’s always better to pay yourself £400 every month, than to do £500 one month and £300 the next.
This means that you build up a surplus in your business account during good months – and if you have a quiet month or go on holiday, there’s still money there to pay your salary.
If after a few months your revenue is growing and there’s a surplus of cash in your business bank account, put your standing order up a bit. Leave it again for a few months, and then put it up again. The key really IS consistency.
3. Save for the important things (tax…)
You know how as an employee, you’re on Pay as You Earn Tax (PAYE)? Your tax is taken out of your pay, before you get a chance to spend the money.
It makes a lot of sense.
And you can use the same principle as a business owner, to avoid that panic when your tax bill is due but you don’t have enough cash to pay it (such a horrid feeling!).
Transfer the money to pay your taxes out of your account as it comes in – before you get a chance to spend it.
You can easily set up a linked savings account to your business account. Aim to transfer 15% of your gross income from clients (plus the VAT if you’re VAT registered).
If you wait until the end of the month – or worse, when your tax bill is actually due – you may well have spent the money on something else.
Your day-to-day business spending will naturally adjust, so that you only spend what’s left. Trying to save the money at the end of the month rarely works. But by paying yourself FIRST and transferring 15% (+VAT if you’re registered), you’ll have enough money to pay your tax bill every year – no matter what you earn!
At the end of the year, if you have more than you need in your tax account – re-invest some of it back into your business. Maybe on training or mentoring; buying a new printer or taking a bonus / dividend for yourself and booking that holiday!
4. Someday, you’ll want to work less hard.
Retirement doesn’t have to mean hanging up your boots, pottering in the garden and watching Countdown (unless that’s what you want, of course).
The world is changing. Maybe you love your work and can see yourself doing something part-time forever. Maybe you’ll still draw an income from your business, long into your later years.
But it’s always worth thinking about how you’ll fund the gap between your State Pension and any savings you have.
Investing in a pension is one option. Your Limited Company can pay in up to £40,000 per year as part of your salary package – which saves on your corporation tax bill and enables you to build your pot for the future.
Bear in mind that company directors are exempt from the new government Workplace Pensions Programme, so do speak to a financial adviser about setting up a suitable director’s scheme for yourself (here’s where we can help).
And I know retirement may feel like a LONG way off right now. But the earlier you start, the longer your money has to grow.
5. Keep on top of it!
Put a firm date in your calendar to sit down and review your money position every 3 months, to see if and how you’re moving towards your goals.
- Can you afford to increase the standing order that you pay yourself each month?
- Are you building up a nice surplus that you can use to pay your wages when you take a week’s holiday, become ill or have a month where business is slower than usual?
- Are your pensions and investments on track? Their value will vary over the short term (month-to-month) but over the longer term, they should be moving in an upward direction.
By keeping on top of your finances, you’re best placed to get out there and enjoy life! While growing your business AND building your nest egg for your future.
But I know it doesn’t always feel easy!
So if it would be helpful to have a chat about organising and managing YOUR money, both in your business and personally, then I’d love to help.
And don’t forget to join our private Facebook community too – where we talk about this kind of thing every day (you’ll be in great company!).
Until next time,