One of the biggest mistakes business owners make is thinking that when you earn a dollar you get to keep most of it. The reality is you will be lucky to keep a third of it. By the time you take off expenses and allow for tax there is often little left, especially in the first few years of setting up a business. Below are a few key things that will help you manage your business finances:
Understand the difference between profit and cashflow
One of the main reasons businesses fail is due to cashflow issues – even though the business may still be profitable. This means that over the course of the year the business is profitable but the income and expenditure may not always match up which leads to a cashflow shortage. This is common in many businesses for many reasons including seasonality, late payment by customers. For example, December/January is often a very quiet time for some businesses in terms of revenue but most of your expenses could still be the same.
Prepare a cashflow forecast
Few small businesses have a working budget and a cashflow forecast that they regularly review. As a result, they make decisions based on guesswork. They don’t need to be complex, in fact the simpler they are the better they will probably be, as if they get complex you tend to not use them. Your cashflow forecast will help you understand the relationship between your income and expenses, how much money you are likely to make and how much you can spend on business development, how much you can afford to pay yourself and how much tax you need to allow for.
Put aside adequate funds for tax and GST
A major issue for small businesses is not having money available to pay tax and GST. The easiest way to manage this is to always put aside a percentage of every dollar you earn into an account for your tax and GST, and forget that this account exists until its tax time. Your accountant should be able to tell you what percentage to use. However, this is often easier said than done for many businesses as they often need the money for other things. Even though it may be a very tough juggling act balancing the need to put money aside for tax and using the money in the business, it is an absolutely critical one. The consequences can be severe if you get it wrong.
There are many software packages that help you manage the finances in your business. I look at my bank accounts and accounting software at least every few days so I know exactly what is going on financially in my business. Statistics clearly show that the more regularly you review your accounts the more successful your business will be. There are some great videos on the IRDs YouTube channel that are worth watching to help you understand how better to manage your finances.