10 Commandments for Small Business Finances
1. Monitor your Cash Flow
The cliché “Cash-is-King” is a cliché for a reason. People who have experienced cash flow issues in business quickly realise why, you can’t exist without it.
- If you can’t pay your employees you can end up with fines, you will lose your employees and you will lose your reputation.
- If you can’t pay you loan, they lender can put you out of business.
- If you can’t pay your bills, they won’t supply you services.
Being profitable isn’t enough. You can make a profit, and go backwards from a cash point of view, especially where you need assets to operate your business, or you are growing quickly.
To manage this, you need to understand your cash inflows, outflows and their timing and whether you can do anything to improve them.
- Taking deposits for work
- Shortening payment terms
- Automate reminders for customers who haven’t paid
- Applying for credit from regular suppliers.
- Build a buffer, don’t be reliant on one big receipt happening to be able to make your critical payments.
2. Use Accounting Software
Believe it or not, there are still plenty of businesses out there that have a “receipts in the shoebox type of system”, and dealing with them when they do GST or year-end taxes. Accounting systems have come a long way and are now much more user friendly, software like Xero and MYOB are very popular. They automatically pull in your bank transactions, and you record what they are as you go. If you use it right, your accountant will love you and you’ll save your time, and money on your accounting fee, because your records are in one place, up to date, and in a system your accountant understands.
3. Keep Your Records up to Date
The longer you leave your admin, the bigger it gets, and the less you’ll want to do it. So, whether you do it yourself and outsource it, keep on top of it regularly. It also saves you time if you need to get a loan, sell the business etc. you already have up to date info at the ready, rather than having to dig up that old shoe box and have someone manually process it.
4. Don’t Wait Until Tax is Due to Start Planning for it
One of the most common issues we see with businesses who get into difficult situations is when they treat their gross income, funds in the bank, like it is tax paid profit like a salary. Out of that money, businesses need to pay their GST and income tax, which can be up to 2 years after they actually earned the money. Work with you accountant to set aside a % of all receipts into a separate bank account purely for tax payments. Avoid the temptation to dip into these reserves for other expenses, ensuring you’re prepared when tax obligations arise. You don’t want to end up in debt to the tax man.
5. Seek Advice
Don’t hesitate to consult with your accountant. Another common issue we see is where a business or individual has committed to, or completed a significant transaction, without advice, and there was a better, cheaper, more tax effective way to do it, only had they known beforehand. This happens a lot with property, even for your main home, if you are thinking of selling, or buying for that matter, consult your accountant, they can save you tens of thousands.
6. Maximise Your Revenue
Ask yourself; When was the last time you tested your pricing? When was the last time someone told you no due to pricing. Are you fully booked? Take your cues from your customers as to whether you are priced correctly in the market. Don’t leave money on the table. [The NZSDA Price Guide provides comprehensive advice and guidance on how to price your products for the New Zealand market. Get in touch with secretary@nzsda.org.nz to purchase a copy.]
7. On the Other Side – Manage Your Expenses
Keep a close eye on expenses, regularly review them for areas of improvement or potential cost-saving opportunities. Don’t spend a dollar to save 33 cents. We often get asked should I buy this to reduce my tax, the answer is inevitably – well, do you need it, how is it going to help your business. If you don’t need to spend the dollar, you’re saving 67 cents. I guess there is some truth to the cliché about tight accountants. If you do need to spend the money, you are slightly better off tax payment timing-wise to spend it in March, than April, to claim it in the current year.
8. Diversify Revenue Streams
Avoid relying too heavily on a single source of income. You can diversify customers, widen your customer base so you are not so reliant on a few customers for you to succeed. You can also diversify your offering, if you do business building signage, maybe you try get into stand alone signage, vehicle or trailer signage etc where you can apply your expertise.
9. Know Your Limitations
There was a reason you got into the profession you’re in, you were interested in it and good at it. If you wanted to be at a desk on your computer all day, you would’ve got an office job or, god forbid, become an accountant for your sins.
If you’re struggling with your book work, spending hours on it on top of your day job at home while you could be spending time with family, or during the day when you could be doing productive work, you can outsource it.
I’ve hopefully just sold you how wonderful accounting software is, but at the end of the day if it’s not your thing, if you have a mental block when it comes to admin, outsource it and focus on what you do best – but having said that….
10. Invest in Yourself
In the same way that organisations like the New Zealand Sign and Display Association help you to upskill and stay across current trends and developments, as a business owner you should understand your books, your accountant can help you with this. At the end of the day, it’s your business, and maximising your results is going to benefit you. You don’t have to enter every invoice, but you should understand what’s going on, as you are ultimately responsible for it.
Tom Maling
Chartered Accountant
Director – Brown & Associates Accounting Group
