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Last updated: 10th March, 2021

Online Business Academy

Financial best practices: a guide for small businesses

Understanding and following finance best practices may seem a challenge for a small business; at first glance it seems like masses of confusing paperwork and complex financial strategy. Sound financial management, however, is in fact far simpler than you may think and is absolutely necessary if you want your business to succeed.

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In this article we cover some key tips for small businesses on how to keep business finances both accurate and healthy:

What are financial best practices?

Best practices are guidelines and ideas that show the most efficient course of action in a business situation. The best way to keep to them is to establish and maintain solid financial habits from the outset.

Doing something as simple as blocking a few hours out of your calendar each month to update your books and ensure your financial statements are up to date will make a world of difference when the time comes to complete your tax return.

As well as being time-efficient, keeping clear records mitigates both financial and legal fraud and risk by ensuring you know what’s happening with your money and your business.

How should a small business manage its finances?

The best way a small business can handle its finances is through routinely updating its budgets, tracking expenses and income through clear financial records. This will help the company avoid negative cashflow and make you more likely to generate a profit.

What financial statements does a small business need?

Balance sheet

A balance sheet tracks the assets, liabilities and owner-held equity of a business, indicating its approximate cash value. All of this data is extremely important if you’re hoping to get investors on board.

  • Assets are everything your business owns and its value, such as cash, equipment and property.
  • Liabilities are everything owed by a business to another entity – these can be anything from loans and unpaid invoices to mortgages.
  • Owner-held equity is the cash value of the company – essentially its assets minus liabilities.

Income statement

This statement accounts for revenues, gains, expenses and losses over a set period, and can be calculated in a single-step or multi-step format. These statements can be used to judge a business’s profitability, guiding its future strategy.

Cash flow statement

A detailed account of the cash generated and used over a period of time; a cash flow statement differs from an income statement – it shows the actual cash in your account as it’s not based on accrual (invoices you are owed).

In the UK, you have to submit your accounts to HMRC with your corporation tax return, and these have to be precise to ensure you’re paying the right amount of tax. For more info go to the Companies House website. These accounts can either be recorded by you personally, by hiring an accountant, or through cloud accounting software, such as QuickBooks or Xero.

How do you manage small business finances more efficiently?

Now that we’ve established some accounting basics and the key statements a small business needs to record, here are some things a small business can do to grow and succeed and also some pitfalls to watch out for. For more tips like the ones below, visit PagoFX’s Online Business Academy to find more information on ways to efficiently manage your business.

Set up a budget

While budgets are not a necessary legal document, they are extremely helpful for your business.Initially they take a bit of time to set up, but you’ll quickly see their worth. By providing a clear view of the financial state of the business, they show you how much you can safely spend and allow you to estimate the amount of revenue you will receive, helping you set expense and revenue goals.

Monitor your books

Even if you’re not responsible for managing your books directly, as a small business owner you should periodically look over your accounts so that you’re informed about the status and health of your business. Doing this can also alert you to wasteful spending and even financial crime.

Create separate bank accounts for business and personal funds

Having separate bank accounts is a critical aspect of money management. If you use your personal bank account for business use, tracking incoming and outgoing payments and their sources becomes more challenging. With separate accounts it is far easier to classify your expenses as business or personal, and you can easily track your profitability through bank statements. Many banks, such as Santander, offer business accounts that are both easy to set up and use, making it a no-brainer.

Make a clear invoicing strategy

Ensure you record who you’re invoicing and when so that you know you’re being paid properly and on time for your services. A great way of doing this is by using a bookkeeping app, such as Asto, where you can create invoices on the go and track their status. That being said, there’s always one company perpetually late at paying invoices. To manage this, you could try creative billing methods, such as offering an early payment discount if invoices are paid within a week. As a small business owner, it’s extremely important to manage cash flow and ensure that your company can still function day-to-day. Having cash tied up in unpaid invoices can often lead to issues paying bills or suppliers down the line. Read more about invoicing in our ultimate guide to invoicing.

Have a cash reserve

As a part of monitoring cash flow, you should also have an emergency cash reserve to help if your business faces some unexpected difficulties.

Stay on top of deadlines

When juggling the many hats that a small business owner has to don, payment deadlines can sometimes spring up out of nowhere. To save yourself this stress and worry, set aside the money you know you’ll need to pay – such as taxes, loans, credit card payments and invoices – to ensure cash is not mistakenly spent on something else. Otherwise, you could accrue hefty late fees or interest. Another option could be using accounting technology to automate the paying of regular bills and invoicing of regular customers, ensuring you’re on top of everything.

The risk of losing out

If you fail to stay on top of your books and are unaware of your business’s financial situation, you risk losing out monetarily. Anything from failing to collect invoices to missing VAT refund claims can harm your business’s prospects by lowering your bottom line. As well as monitoring your books, you should also monitor your day-to-day operations and ensure you’re not overpaying for key services, such as transferring money abroad. For example, PagoFX for Business provides quick and easy business transfers abroad, with transparent low costs and no mark-up on exchange rates.

Is a sole trader any different? Do I need a business account as a sole trader?

As a sole trader, separate business and personal accounts are not a legal requirement, but as they’re so simple to set up, you may as well do so. Aside from all the benefits listed above, having separate accounts appears more professional on invoices and may give you access to business-related finance, such as loans. This can be extremely helpful when you’re trying to grow your company.

Are there other tips for how a sole trader should manage money?

Pay yourself a wage

Pay yourself and record it. While caring for the financial health of the business, you should also look after your personal finances, and you need to know what your salary is to factor it into your bookkeeping.

Sole trader risks

As a sole trader, you and the business are one and the same, meaning you’re liable for its debts in case it fails. As such, if your business grows or changes nature quickly, you may want to set up your own limited company to mitigate these risks.

Be mindful of your expenses

Remember that a large portion of the running costs of your business can be classified as expenses, meaning you’ll pay less tax and can get VAT refunds.

How do I claim expenses or a VAT refund as a sole trader?

Expenses can be claimed on anything, from equipment and office furniture to accommodation when travelling and petrol costs.

Allowable business expenses

Allowable business expenses can lower the profit on which sole traders usually pay Income Tax. The general rule for claiming expenses is they must be ‘wholly and exclusively’ incurred as a part of, and in service of, your profession. These expenses are filed during a Self-Assessment, usually conducted in the UK in January. For more information on business expenses as a sole trader, visit the Gov.UK website.

VAT registration

If annual turnover is above the VAT registration threshold (currently £85,000) then you must register. Below this, it’s optional. You first must work out which goods and services you need to charge VAT on, and how much VAT. When charging for goods, you must show VAT information on invoices to customers and on your VAT Return to HMRC, and you could earn a VAT refund if you’ve paid more VAT than you’ve charged.

Sound financial management is key to your business’s success in more ways than you might expect. It gives you a better insight into the performance of your business and makes it easier to obtain a loan, as lenders will have a clear overview of your accounts. Through this, financial management can help you direct your strategy to facilitate growth.

As well as managing your money, good financial management involves ensuring the money you pay to suppliers or manufacturers gets there quickly, safely and with no hidden costs. If you’re sending money abroad, PagoFX for Business is an easy-to-use money transfer service backed by Santander that offers low, transparent fees and no mark-up on exchange rates. PagoFX is available on the App Store and Google Play and via PagoFX.com. 

This article is provided as general information purposes only and is not intended to cover all aspects of the topic. We recommend that you take professional and specialised advice before taking, or refraining from, any action based on the content of this publication, as this article is not intended to constitute expert advice. We do not guarantee, explicitly or implicitly, that the content of this article is accurate, complete or up-to-date. The information in this article does not constitute legal, tax or other professional advice from PagoFX or its affiliates.

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