Knowing how to manage finances is crucial for the success of small businesses, sole traders, and contractors. With our finance tips provided in a step-by-step guide, you can effectively stay on top of your finances and avoid potential failure.
Your business model dictates how your business operates and generates revenue, regardless of the amount you aim to earn. It aids in determining your startup costs and the income required to cover expenses and achieve profitability.
To create an effective business model, you should:
- Identify operating expenses such as staff salaries, rent, transportation, and utility bills.
- Estimate the potential number of customers, such as foot traffic, and consider competitor performance in your area.
- Understand the limitations of your business, such as the seating capacity of your café and the number of customers you can serve in a day.
- Keep track of industry-specific metrics, such as the cost of goods for a café versus an IT contractor.
Having a clear understanding of your expenses and profit goals, the next step is to create a budget that outlines your plan to achieve those goals.
To create an effective budget, you should:
- Set your targets — what are your profit goals for the year?
- Plan for your costs — when do payments need to be made?
- Review your budget with how you’re actually tracking monthly.
It’s advisable to prioritise modelling operating costs before determining the amount of money required to cover them.
To gain a thorough understanding of your business’s financial performance, maintaining accurate records is essential.
To effectively manage your finances, you should:
- Keep precise and up-to-date records.
- Stay informed about your cash flow, including money coming in and going out.
- Use a separate bank account dedicated to work income and expenses to track spending.
- Analyse financial trends and prepare for quiet periods or gaps between contracts.
- Set aside funds for periodic payments, such as taxes and levies.
- Consider paying bills in instalments, such as spreading out accountant fees throughout the year instead of one large invoice.
Keep in mind that: Full income – Allowable expenses = Taxable income
Discover the system that suits you best. Online systems can simplify the process of maintaining updated records.
Tips and advice on systems that can help
Spending money wisely
According to Vicky Ha, the founder of House of Dumplings, managing finances involves having enough funds before making purchases. She explains, “I started with two pasta machines. I mixed the dough by hand. That is just stupid, but I didn’t want to spend $1,000 on a mixer. I did it the hard way and until I had the money in the bank I wouldn’t buy it.”
Vicky emphasises the importance of distinguishing between wants and needs in business, stating, “What you want and what you need is completely different. That’s business 101. Never get what you can’t afford — that’s the bottom line for me.”
She also recognises that running a successful business requires identifying one’s strengths and weaknesses and seeking help where necessary. Vicky says, “I worked on what I wasn’t good at. I hate numbers and details. I had to find the right people to do that stuff for me. If that means paying people, that’s necessary because you need to concentrate on what you’re good at.”
It’s essential to receive payment for the work you’ve completed. Until you receive payment, you’re essentially financing the cost of the project on your own.
Here are some things to keep in mind:
- Be clear about the estimated cost of the job before you start.
- Send invoices for the work you’ve done. Your customers won’t pay until they’ve been invoiced.
- Send invoices as soon as possible. The longer you wait, the lower the priority it becomes for your customer.
- Follow up with debtors regularly, for example, at least once a month.
To effectively manage a business’s finances, it may be necessary to seek assistance from an accountant or bookkeeper. Here are some recommended steps:
- Seek advice before making significant financial decisions, such as expanding into a new area or investing in high-value assets, especially if you are unsure.
- Don’t hesitate to ask for help if you feel overwhelmed, particularly during key times such as when completing your first tax return or when your business is operating at a loss.
- Consider the cost of hiring a financial expert versus attempting to handle the tasks yourself, as it may prove to be more cost-effective in the long run.
Consider delegating tasks to free up time. Hiring help with your accounts can allow you to focus on other crucial areas of your business.
Are you struggling with accounting and business management for your business? We are here to help! Get in touch with us to discuss how our expert services can support your business’s success. Contact us today to schedule a free consultation and see how we can add value to your operations.
