Mastering your finances: Essential tips for small business owners

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As a small business owner, you spend a lot of your time, energy and resources working for your business, but it’s important to think about how to make your business work for you by mastering your finances.

Decide on your salary 

I’ve found that a lot of small businesses operate as charities unintentionally. This is because business owners don’t calculate their salary into their costs. A lot of small businesses don’t plan to operate at a loss; they think they’re making money because they have sales, but if sales are only enough to cover costs and not salaries, you’re working for free, hence operating as a charity. 

Alternatively, some small business owners may decide to not take a salary as they still have a full-time job. But this is something that you should plan for and would also need to consider when deciding on pricing your products and services.

Understand the difference between your personal goals and business goals  

Your business may have specific goals that are different to your own personal goals, however, one may motivate the other. 

For example, as a business owner, you may want to earn £100K in order to qualify for a mortgage. So as a result your business goal would be to achieve a turnover of £300K to give you the £100K salary. This is a good example of how your personal goal could drive your business goal. 

Separate your personal and business expenses 

Many small business owners are living their personal lives through their business and are oblivious to the consequences of this. For example, when it comes to getting a mortgage, if your lifestyle is paid through your business and you take a small salary, this could result in not being able to afford a mortgage that matches your true lifestyle. The bank will only look at the income you have coming in, separate to your business expenses.

You may need to speak to a mortgage broker to understand how much you can borrow and how much deposit you would need, then you can determine how much income you need from your company. Finally, speak to an accountant about the best way to make the income.

You also need to ensure you’re taking the correct amount of income through PAYE or dividends. 

Choose your business structure 

You may decide to operate as a sole trader at the start of your business as it may be more cost effective and there are fewer administrative requirements than a limited company. As you continue to build, you’ll need to think about what structure makes best financial sense for your business. You may decide later to become a limited company to benefit from protection and it may be more tax-efficient. 

Be open to changing the structure of your business as it grows; the business may have a completely different structure after only 2 years.

Consider your retirement plan

Think about what retirement looks like for you. Many small business owners think they will just sell their business later in the future which is a great idea, but it’s important to have a backup and really consider this option.

When thinking about selling your business you need to ask yourself if the business can run without you? Will your business still be relevant in 30 or 40 years? If you sell your business, would you become a board member? 

You could also look into other things you can benefit from, such as pensions through your business and investments such as ISAs. 

As a small business owner your goal may be to live life on your own terms. This may not be about money but picking up your kids from school, spending more time with your family or being able to work from wherever you decide. To ensure you’re running a profitable and effective business, it’s important to plan and manage your finances well.


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