It’s not easy starting a small business or running one. It takes a lot of trial and error, but eventually you can find the right rhythm for you. Maintaining a small business and its finances can be a daunting task. Below the OutRise team have put together some small business financial tips and even more information you should be aware of to help you on your journey to becoming a pioneering business owner.
Financial tips for small businesses
Separate your personal and business goals
Small business owners should put time aside to think about and distinguish between your personal and business goals when it comes to finances. When you run or are starting a business that you enjoy working with, you can easily start to put your business’ goals ahead of your own. It’s important to find a balance between the two, as you need to maintain the financial wellbeing of yourself and your business.
Keep business and personal expenses separate
Calculating tax and having your business valued is no easy task, but it gets even more complex if you don’t separate your personal expenses and your business expenses. If you keep them both separate it can make those tasks run a lot smoother.
The simplest way to start doing this is by opening a business bank account and getting a credit card for your business expenses. Using a business credit card will also allow you to build up your credit score, making it easier to acquire business funding in the future. There are also some very robust software apps that should be at the core of your business to maximise your systems and processes.
Diversify your investments
Investing back into your own small business is a great way to invest in your business’ future, and it helps with expansion. But it isn’t wise to put all your eggs in one basket; if something were to happen, and your business doesn’t perform as well as you thought, you could lose that investment. That’s why it’s wise to diversify your investments across various business opportunities. That way, if one opportunity doesn’t work out, only a fraction of your overall investment is lost. Diversifying your investments lowers the level of risk.
Consider hiring an accountant
In order to keep a small business in the right direction, it needs your full attention and focus. As businesses grow, business owners have less and less time to keep up with their accounting obligations. Although the accounting and finances of small businesses doesn’t seem like an incredibly important part of running one, it’s actually vital when it comes to business planning and strategising.
Hiring an accountant will allow small business owners to focus on their business goals and where they want their business to be in the future. Accountants can also accurately advise business owners on which goals are possible in their current financial situation.
Increase your small business' profits
Every business, big or small, wants their profits to increase, this is so that they can continue to do the work they love and expand their level of services or products. Click below for 5 methods on how to increase your business profits:
Small Business Finance
How much profit does your small business make?
As a small business it’s important to keep track of your finances, especially the amount of profit you are generating. This can tell you how financially healthy your business really is. Take a look at our Business Profit Calculator to check up on how your small business is doing!
What’s the value of your small business?
Believe it or not, businesses hold value. The value of your small business will depend on how well it’s performing. Use our Business Value Calculator to find out how much your business is worth!
Small business financial terms you should familiarise yourself with
Finance term #1: PAYE
For each employee on your payroll, you must calculate and deduct their National Insurance Contributions and income tax from their salaries. You, as the employer will then have to pay these two amounts to HMRC. PAYE must be paid on a monthly basis. Because you own your small business, you will need to pay employer’s National insurance. This is typically at a rate of 13.8%. If you have more than 1 employee on payroll then you will likely be entitled to the employment allowance which is currently £5,000 per year, so make sure you are claiming this too!
Finance term #2: Income tax rates
Income tax rates will vary depending on the salaries of your small business’ employees. Every employee does have a tax free personal allowance of £12.5K. Income tax has a basic rate of 20% on incomes over £12,500, but it does have a higher rate “band” when income is above £50,000, which is taxed at 40%. Once incomes reach above £100,000 you start to lose your personal allowance so it is important that you plan around this to maximise your take-home and other benefits you may be receiving. Above £150,000, the tax rate becomes 45%. From 6th April 2023 this 45% band will kick in at income levels above £125,000.
If your small business is a limited company, income from dividends actually has a lower rate of tax. You will also not need to pay any National Insurance contributions. This is often a very tax efficient way to take money out of your limited company. However, from April 2023 it is highly likely that taking a more typical salary instead of dividends will be more tax efficient.
Finance term #3: VAT
If your small business’ annual turnover is £85,000 or more, you must register to pay VAT, regardless of your business’s legal structure. If your small business’s annual turnover is lower than £85,000, registering for VAT is actually optional.
Your VAT financials, like returns and payments, will typically have to be filed and paid at the end of each financial quarter – every 3 months. Your small business will have to fill out VAT returns and pay/reclaim the difference between the VAT you have paid on business-related expenses and the VAT payments you have received.
Finance term #4: Bookkeeping
Your small business must keep its finances up to date and completely accurate, and bookkeeping can help you achieve and maintain this. Bookkeeping included tasks such as; recording your expenses, generating and sending out invoices, paying your employees on time, and monitoring your outgoing payments.
Finance term #5: Corporation tax
For a small business to succeed it will need to make a profit. If it makes a profit, then it will pay corporation tax based on those profits. For 21/22, that is 19%, for 22/23 it’s dependent on your profits, ranging from 19% to 25%.
Does your small business need help and advice with it’s finances? Get in touch with our team of accountants below by booking a discovery call. You can also find out more about our accountancy services.