11 Sep 2023
Your business needs a budget but when you’re starting out it can be tempting to skip this step. That would be a mistake, because a budget is a powerful tool to ensure the financial health of your small business. A realistic budget enables you to make confident financial decisions and save money for future investment and expansion. On top of this, your budget will prevent you from overspending and provide concrete goals against which you can measure your success.
It can be difficult to know where to start when it comes to creating a budget, particularly during your first year in business. You’ll need to work with estimates if this is the case, but it will still make financial planning much easier. Once you’ve laid out a realistic budget, you’ll be able to adjust it as necessary rather than starting from scratch. Here are six easy steps to creating a realistic budget for your business.
1. Calculate Your Income
Business income is the money you receive from customers for your goods or services. This is easy to work out from your records if you’ve been in business for a while, but if you’re just starting out you’ll need to make an estimate. Try to be as realistic as possible but if in doubt, always err on the side of caution. It’s better to be conservative with your budget than risk overspending.
If you’ve been in business for a year or more, take some time to analyse seasonal trends. If you’re new, do some research on patterns within your industry. Many businesses experience a boom in sales at Christmas, followed by a lull in January. It’s important to plan for these peaks and troughs as accurately as you can.
2. Determine Your Costs
Once you’ve worked out your projected income, it’s time to take a look at your expenses. Business costs fall into three different categories: fixed, semi-variable and variable.
Fixed: these costs are the easiest ones to calculate. Fixed costs are the expenses that are likely to remain the same for the next year or so, such as rent, internet and insurance.
Semi-variable: this is a bit of a grey area. Semi-variable costs are fixed costs which may increase or decrease in proportion to your workload. For example, a boom in sales might result in increased hires, phone bills or power usage.
Variables: these expenses are directly linked to your number of sales, such as commissions or raw materials. This is the part of your budget that you’re most likely to have to tweak over time. You can calculate this by adding together all of your variable costs over a given period of time and then dividing them by your production volume.
3. Factor in One-Off Expenses
You need some wiggle room in your budget in case things go wrong. Unforeseen expenses do crop up every now as then, so you need to be ready for them. For example, if a piece of equipment breaks down, you’ll need to replace it as soon as possible so that it doesn’t impede productivity. Of course, some one-off expenses are planned, such as facility upgrades or conferences. Keep a separate fund for this type of cost and don’t be tempted to put it towards your regular expenses.
4. Work Out Your Profit
Your profit represents how much money you’re actually making. You could have a huge income, but that doesn’t mean much if it’s outweighed by even larger costs. To calculate your profit, subtract your costs from your income.
5. Refresh
A budget doesn’t mean much if you don’t review it regularly, and a lot can change in a surprisingly short amount of time. It’s vital to keep checking your budget and making adjustments whenever necessary. Each month, set aside some time to check your finances and compare them against your plan. This will keep you on track and allow you to keep your budget relevant to your business.
6. Use Bookkeeping Tools
Staying on top of your budget can be time-consuming, especially when your business is growing and you’ve got a million other things to do. Cloud-based bookkeeping software is the easiest and most reliable way to keep track of your expenses and you’ll have 24/7 access to your records from anywhere in the world, so long as there’s an internet connection.
The Importance of Budgeting
A realistic budget for your business makes it so much easier to plan for the future. However, regularly reviewing and adjusting your budget is essential, or it could quickly become outdated. Your budget is a roadmap for your business and it helps you to prepare for all manner of situations. Most importantly, it gives you control over your finances, which will help your business not just to survive, but to flourish.
Did you know we’ve also got a free downloadable eBook dedicated to the most common profit draining mistakes made by small businesses. Check it out here.
Book a free consultation here, to learn more about our accounting services.
7 Sep 2023
Cash is king in business and good cash flow management is essential for the success of your startup. Think of cash flow as blood flow and you’ll understand just how vital it is to the health of your business; without it, you’ll die. That sounds bleak, but it really is important to manage your cash flow well from the very beginning and protect your business against any problems along the way.
Even if your business is very profitable, you’ll struggle to cover your costs without sufficient funds available. However, at the same time, an excess of cash suggests that you’re not re-investing enough into scaling your business. Finding a balance takes accuracy and attention, but it can be done by following the steps outlined below.
1. Regularly Prepare Cash Flow Statements
Before you can start planning for the future you need to get a clear picture of where you are right now. This is where cash flow statements come in. A cash flow statement provides an overview of how much cash is coming in and going out of your business. This then allows you to perform a detailed analysis of the financial health of your business.
A cash flow statement requires a lot of data and so a cash flow calculator can be very useful in helping you prepare this document. You also might want to think about hiring an accountant to ensure that your statement is accurate, since getting this wrong can lead to bigger mistakes down the line.
2. Create Cash Flow Projections
It’s important to understand what your cash flow is likely to look like in the months to come so that you can plan ahead and manage your finances wisely. Realistic cash flow projections can help you to invest your money at the right moment and account for any potential pitfalls along the way. This process can be time-consuming and complex, so again it’s worth using accounting software or enlisting the help of a professional. These projections are incredibly valuable when it comes to scaling up your business and so they’re worth investing in.
3. Prepare a Safety Net
Any entrepreneur will tell you that it pays to have a safety net, particularly when you’re scaling your business. Investing in growth can lead to short-term negative cash flow which is perfectly okay, so long as you’re prepared for it. A cash reserve will help to smooth things over when you’re having cash flow problems and ensure that you have enough funds available in order to pay suppliers and staff. It’s also worth investigating whether a credit card or line of credit could be beneficial to your startup to help you keep operations going when cash runs dry.
4. Plan For the Long Term
As important as it is to have a handle on where you are right now, your business won’t be this way forever. After all, the ultimate goal is to grow out of the startup stage – and this means big financial changes. Furthermore, there are many factors outside of your control that could affect your cash flow in the future, such as inflation, recession or late payments from clients. It’s always best to be prepared for the worst so that your business is protected against any eventuality. Take some time to research and forecast potential changes in market conditions that could impact you in the future. Again, it’s worth consulting your accountant for advice that could help to protect your business.
5. Stay On Top of Invoices
It’s important to manage cash inflow effectively and sadly, you can’t just bank on customers always paying you on time. You need to ensure that you send invoices in a timely manner, set clear payment deadlines, send reminders and chase up late payments. If you have a large customer base, this can be a time consuming process and it may be worth looking into accounting or invoicing software to take care of this for you. Not only does this help you to manage cash inflow accurately, it also frees up your time for more valuable pursuits.
Cash Flow is Key to Your Success
There’s a lot to think about as an entrepreneur but managing your cash flow well is one of the most important ways of ensuring the financial health of your business. Not only does this help you to protect your startup against market changes and late payments, it enables you to invest your money wisely and at the right moment. Good cash flow management isn’t just about protecting your business from collapse, it’s also vital to help your startup to grow and flourish.
If you’d like to talk to us about how we work with startup businesses like you, book a free consultation with us.
1 Sep 2023
There are many benefits to using cloud accounting software, such as value for money, time-saving automation and more flexible working, but did you know that it can help you to get paid faster, too? Getting paid more quickly is one of the best ways to improve your cash flow and keep your business running smoothly, so don’t overlook this important benefit of cloud accounting software. Let’s take a closer look at how cloud accounting can help you get paid faster.
1. Automated Invoicing
If you want to get paid quickly then you have to get your invoices right. Preparing your invoices manually increases the likelihood of human error. Mistakes on your invoices can then lead to unhappy customers and a lot of unnecessary back-and-forth trying to fix the issue. This means that you’re likely to be waiting for longer for the money you’re owed to reach your bank account.
Cloud accounting software programs can automate your invoices for you, allowing you to send accurate invoices on time. Best of all, the invoice is emailed straight to your client’s inbox, so you don’t have to wait several days for them to receive it by mail.
Furthermore, if you provide your clients with a subscription service then you can set up your accounting software to automatically send recurring invoices. This ensures that your invoices are always sent on the correct date and it will save you time and effort, too.
2. Track Your Receivables
It can be difficult to remember which of your clients owe you money at any given moment, and if you manually invoice them it may take a while to find out. This makes it more difficult to stay on top of your receivables and chase up late payments in a timely manner. However, cloud accounting software enables you to see who owes you money with a quick glance at your dashboard and then you can take action accordingly.
Your clients are far less likely to pay you on time if they think that you’re forgetful and unlikely to follow up. However, if you consistently send them payment reminders and are prompt to follow up on missed deadlines, your clients will take your payment terms seriously.
If you notice that a client is frequently late with payment, it may be time to consider introducing late fees. Of course, you should give them plenty of notice that you are making these changes. When the deadline is approaching, make sure to send them a payment reminder that clearly states the fees again so that they have time to cough up before incurring fees. This will certainly incentivise late-paying clients to respect your deadlines. Best of all, cloud accounting software allows you to easily automate these charges so that you don’t have to do any complex calculations yourself, either.
3. Shorter Payment Cycles
Many small businesses offer their clients 30 days to pay, but these generous deadlines may soon be a thing of the past. Back when companies had no choice but to mail physical invoices, 30 day payment cycles were necessary. It would take at least a few days for the invoice to reach the client, who would then need to process the invoice and issue a cheque, which would then need to be mailed back to the business owner.
Now, however, thanks to the power of cloud accounting, 30 day payment terms are no longer necessary. It takes mere seconds for digital copies of an invoice to reach a client’s inbox and payments are electronic. Therefore, consider leveraging the convenience of cloud based accounting software to shorten your terms and get paid faster.
4. It’s Easier for Clients to Pay You
Electronic invoicing makes it easier for your clients to pay you and therefore they are likely to do it far sooner. Cloud accounting software allows you to accept several forms of payment, including PayPal, debit cards and bank transfers. Your clients simply have to choose the option that is most convenient for them and they can click a link to pay your invoice in full. Your cloud accounting platform will then identify each payment according to the customer and invoice number, ensuring that all of your records automatically stay accurate and up-to-date.
Conclusion
As a business owner, getting paid on time is probably one of the most difficult parts of your job – and the most necessary. Take advantage of the capabilities of cloud accounting software to speed up your payment process and improve your cash flow. This will ensure that your business remains in the best possible financial health, whilst saving you a lot of time and energy.
If you’d like to speak to us about how we can support you with cloud accounting, book a free consultation here.
29 Aug 2023
Running a small business is rewarding, but it comes with various challenges, finances being one of them – especially when the geopolitical landscape has gone wild and numbers simply aren’t your thing.
Whether you’re an entrepreneur struggling to keep your small business afloat or a seasoned business owner trying to navigate unpredictable economic times, handling finances for your business is crucial but can feel daunting. In this blog post, we will share our tips on how you can manage your finances during periods of economic uncertainty.
Create a Financial Plan
One of the most effective ways to navigate any kind of uncertainty is by creating a plan. A financial plan helps you forecast your business’s income and expenses and make decisions influenced by the right information. Knowing your short and long term goals is a helpful place to start, from there you can evaluable your current financial position, and identify any risks your business might be up against.
Most accountancy software will allow you to run reports and track your performance, helping you make decisions at every stage. You’ll see where you have opportunities to reduce costs and maximise your best income streams.
Have Financial Reserves
It is always good to set aside a portion of your revenue to create financial reserves in anticipation of uncertain times. Having a financial reserve can help you cover sudden expenses, unexpected costs, or a downturn in business. I recommend aiming to have three to six months’ worth of expenses set aside as a reserve.
Stress-Test Your Business
Stress-testing your business means developing a set of scenarios and projecting what the impact would be on your business. Consider how your sales, cash flow, and stocks would be impacted. This can help you prepare for potential financial challenges and make appropriate adjustments to your budget, stock, and marketing strategies.
Maintain Relationships
Relationships matter, no more so than in uncertain times. Doing what you can to keep in favour with your bank and suppliers will help you if you face an unforeseen situation. Banks are more willing to lend money to businesses with good credit scores. Similarly, good relationships with suppliers can help you negotiate better payment terms, discounts, and extended repayment plans to help you manage your cash flow better.
Stay Up To Date
Finally, staying up-to-date on regulations and laws relevant to your business is essential at all times, but avoid costly mistakes might seem even more important when the economy feels more difficult. A great bookkeeper or accountant will always keep you up to date on anything that will impact your business finances.
Conclusion
Managing finances during uncertain times can be challenging, but it is not impossible. By creating a financial plan, establishing financial reserves, stress-testing your business, maintaining good relationships with your banker and suppliers, and getting the support of an expert bookkeeper or accountant, you have the best chance of navigating financial uncertainty and taking care of your financial health. Preparing for the future is always more advantageous than reacting to it, so start planning your business’s financial future today.
If you’d like to talk to me about how we work with small businesses like you book a free consultation with us.
18 Aug 2023
As a small business owner, you have the power to decide what your priorities are. However, regardless of your goals for the company, there are certain KPIs that should be tracked in order to ensure success. These five KPIs will help give you an idea of how well your company is doing financially and if it’s on track to meet its goals.
What Are KPIs?
KPIs are key performance indicators. This is a way for companies to measure the health of their business by evaluating certain factors, such as increased sales or a decrease in spending.
You can’t track every single possible KPI under the sun – it’s impossible. However, there are some universal KPIs that you need to keep an eye on regardless of your niche and business model.
The following seven KPIs should be used by small businesses to track success. If you’re looking into specific areas that your company could improve upon, these metrics can help you determine what to focus on.
Net Profit
Net profit is the amount of money your business makes after factoring out expenses and other costs. As a small business owner, you need to know whether or not your company is turning a healthy profit on its operations.
It’s important to understand the difference between revenue and profit. Let’s say your business turned over $100,000 last year. If you spent $40,000 then your net profit is $60,000.
However, if you turned over $120,000 but spent $80,000, you still keep $40,000 as profit. More revenue does not always equate to more profit, so it’s important to keep an eye on this figure.
Net Profit Margin
Net profit margin is the percentage of net profits your company makes. This number represents how efficient you are with your finances and whether or not you’re making a healthy amount on each sale. If this figure drops, it could be an indicator that there’s an issue in terms of spending or that revenue increases need to be made.
Let’s go back to the example above.
Again, let’s say that you made $100,000 in revenue and spent $40,000. Your net profit is $60,000, giving you a profit margin of 60%.
Now let’s imagine you made $120,000 in revenue and spent $60,000. Your net profit is still $60,000 but your profit margin has decreased to 50%.
Your net profit margin is a great indicator of how well you’re spending and making money. It can also inform decision making around pricing and marketing.
Quick Ratio
The quick ratio is a number that represents how efficient your company’s liquidity is. It tells you whether or not your business can meet its short-term financial obligations with the assets it currently has on hand.
In this sense, “quick” refers to liquid – i.e., money in checking accounts and easily convertible investments like stocks and bonds.
The Quick Ratio is calculated like this:
(Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities = Quick Ratio
A Quick Ratio of 1 or greater is good news for your business because it means you have enough assets available to cover your expenses and keep your company afloat. A number lower than 1 suggests that your business is struggling to meet its obligations and may need to borrow money or liquidate some assets.
Cash-to-Debt Ratio
The cash-to-debt ratio tells you how much liquidity a company has relative to its liabilities. It’s another great indicator of whether or not your business can pay off any debts it might have.
To calculate your cash-to-debt ratio, divide the company’s cash by its current liabilities:
Cash from Operations/Total Debt
This is how long it would take for your business to pay off its current liabilities if it used all of its cash in hand.
You should use your cash-to-debt ratio to help you figure out how much short-term and long-term debt your business can handle.
Cost of Customer Acquisition
As a small business owner, attracting new customers is no doubt one of your primary goals, but how much do you need to spend in order to do so?
The cost of customer acquisition is the amount you spend, on average, to get a new customer. You should use this metric to inform your sales process and marketing strategies because it can give you an idea of how much money you need in order to compensate for all costs associated with bringing customers on board.
Summary
The KPIs small business owners should be tracking to ensure financial success are: net profit, net profit margin, the quick ratio, cash-to-debt ratio, and cost of customer acquisition. These numbers can help you make more informed decisions about your business and to ensure that it’s financially stable.
Did you know we’ve also got a free downloadable eBook dedicated to the most common profit draining mistakes made by small businesses. Check it out here.
Book a free consultation here, to learn more about our accounting services.
15 Aug 2023
If you’re a business owner, then you know that keeping your finances in order is of utmost importance. One important task in financial management is reconciling your bank statements. But what are bank reconciliations, and why do they matter? Let’s get into it.
What is Bank Reconciliation?
Bank reconciliation is the process of comparing your company’s bank statements with your own records of transactions. This is done to ensure that all transactions are accounted for, and to identify any discrepancies.
Why Does Bank Reconciliation Matter?
There are a few reasons why bank reconciliation matters:
- It helps you catch errors: If there are any errors in your transaction records, reconciling your bank statements will help you catch them.
- It helps you to detect fraud: By reconciling your statements, you can keep an eye out for any suspicious activity in your account.
- It allows you to stay organised: Reconciling your statements on a regular basis will help you stay on top of your finances and keep everything organised.
How to Do Bank Reconciliation
Step one: get your bank records. You could do this via your accounting software or by accessing your online statements.
Step two: pull up your business transaction records. This is your ledger of all the money that has entered and left your business over a certain period of time. It could take the form of a spreadsheet, a logbook or your accounting software.
Step three: choose a starting point. This is usually the point at which you performed your last bank reconciliation.
Step four: run through your bank deposits and ensure that they match up with your records. Each deposit should appear as income on your ledger.
Step five: do the same with withdrawals and expenses. If there are discrepancies, remember that some payments may not yet have been taken or check to see whether you paid using a different account.
Step six: check your end balance. The final step is to make sure that your ending balance on your bank statement matches up with the balance on your records. If it doesn’t, then there’s an error somewhere that needs to be fixed.
Problems and Inconsistencies
Every now and then you will come across discrepancies and mystery transactions when you perform bank reconciliations. There’s no need to panic – this is totally normal! This is exactly why it’s important to perform bank reconciliations regularly.
Common cause of problems when performing bank reconciliations include:
- Timing: Transactions can sometimes take a few days to process, so they might not appear on your records right away.
- Fees: Make sure to check for any fees that might have been charged by the bank. These can sometimes be small and easy to miss.
- Multiple accounts and credit cards: If you have multiple accounts or credit cards, it can be easy to mix up transactions.
- Different currencies: If you do business in different currencies, then exchange rates can cause discrepancies.
- Mistakes: keystroke errors, misread numbers and other human errors can all lead to discrepancies in your records.
The important thing is to not get discouraged – bank reconciliations are an important part of financial management, and the more you do them, the easier they’ll become. And if you ever come across a problem that you can’t solve, don’t hesitate to ask your accountant, bookkeeper, or financial advisor for help.
Bank Reconciliation Software
If you want to make bank reconciliation easier, there’s a range of software available that can automate the process. This type of software can be particularly useful for businesses with a large number of transactions. Some of the best ones include:
- Xero
- QuickBooks
- FreshBook
- Wave
- Sage
Final Thoughts
Doing bank reconciliations on a regular basis is an important task for any business owner. It helps you catch errors, prevent fraud and stay organised. And while it might seem like a daunting task, it’s easy when you know how – especially if you use the right software.
Happy reconciling!
If you’d like to speak to us about how we can help you manage your finances, book a free consultation here.
