Ever shown a profit only to find you haven’t got enough cash to pay the bills, or discovered that you haven’t put aside enough money to cover your tax return? You’re not alone.
Being responsible for your business’s finances means you’re also open to a number of nasty shocks. Some of the most common, and nastiest, surprises for small businesses include:
Losing a well-paying customer
An increase in interest rates
Losing a critical (and expensive) equipment
Losing a member of staff
Receiving a higher than expected tax bill
Not having your expenses accepted
Payment delays
Unexpected legal fees, especially when starting out
Whether you’ve been in business for 5 months or 15 years, there always unexpected events ready to knock you back. Fortunately, there are also a few tried and tested ways to protect yourself from the fallout, if not avoid these nasty surprises altogether:
Keep accurate books
The number one way to pre-empt any nasty financial surprise is to start keeping accurate and up-to-date books.
Accurate records mean you can see exactly how your business is performing on a weekly or even daily basis. This level of insight will help you spot any negative trends well in advance, and take course-correcting action in time.
Regular and accurate bookkeeping can also help reduce stress and reduce the chance of errors at year end. After all, you’re more likely to have lost or forgotten to log receipts if you only check in and update your books once every few months. This’ll result in incorrect records and black holes you’ll have to compensate for later down the line.
If numbers aren’t your strong point, or you’ve got more business-critical work to attend to, then consider adopting bookkeeping software. It provides a secure, streamlined data entry system that’ll encourage accurate records. Some software, like KashFlow, also generates a range of reports that’ll help better analyse your business’s financial health and identify business trends.
Keep on top of your savings
In an ideal scenario, you should have 6 months of income saved into an account. This’ll act as a cushion and lessen the blow of any unexpected problems.
Starting a savings account can take time, but the key is just to save as much as you possibly can. It’ll soon add up. Make sure you’ve paid off any debts first, then when you’re in the clear, start looking at savings and investment options that best suit your business.
One good tip is to open a separate business account specifically to save towards your next VAT or Corporation Tax bill.
If your books are up to date, then you’ll be able to work out your monthly VAT liability and set this aside ready for your VAT return. Similarly, you can roughly calculate what your Corporation Tax bill is going to be (estimate it for 20% of your net profit) and set this aside too.
This way, you’re not having to scrape around at the end of the year as you’ve predicted and saved a suitable amount throughout the year.
Predicting your tax bill, and how much money will be left once it’s been paid, will also help you formulate a realistic plan for business savings or reinvestment.
Improve your reporting
With your books in order, you’ll be better placed to predict your sales and expenditure for the year. By comparing these predictions with your profit & loss account, you’ll be able to identify areas like reducing costs, increasing income and other changes will have the biggest impact.
For more on the types of report you can create, and the impact they’ll have on your business, make sure you read our guide to financial reporting: https://smallbusiness.co.uk/financial-reporting-2539999/
Prepare your tax returns as far in advance as possible
Filing your tax return early is a good way of establishing where you stand. Contrary to popular belief, it doesn’t actually mean paying your taxes early. This essentially means you know how much money is leaving your business well before it goes – so you can better budget.
If you leave your tax returns until the last possible minute, you run a higher risk of making errors. This can result in you paying too much tax, or not paying enough tax and therefore opening yourself up to fines and interest payments.
If you file your return early, however, then you have plenty of time to organise your cash flow, save enough money and double check your forms.
Another bonus is that HMRC don’t wait until 31st January to pay you. This means any money you’re due back will be sent as early as possible. So if you think you’ve overpaid tax, get it sent in!
Running your own business comes with so many variables that you never know what’s around the corner, but with accurate bookkeeping to help you predict the shape of your business, and strong savings to offer a cushion, you’ll be much better placed to meet these challenges head on – and succeed!
Further reading on avoiding financial surprises
