Have a Budget.
When we were younger, and some folks still do this, we wrote on the back of an envelope the amount of money we wanted to save and placed money into the different envelopes for certain expenses like bills, savings, gifts, and holidays. As we get more financially committed envelopes aren’t going to be big enough!
For small business, in the first year a budget is more of a business plan – what income might come in to cover the expected costs. In year two, a 12-month budget is possible as it can be based on the first 12 months spending habits and invoices raised.
After years 2 to 3, and at about the same time that most businesses question if they should continue to be in business as cash resources could be very tight. This is where a budget detailing the date, the amount and any possible cuts that can be created before the budgeted period, can keep a business owner accountable and allow for cash management.
Here are five ways to manage your money as a small business owner.
1. Track your spending
Tracking your business expenses sounds obvious, however it’s often the case that business owners have no idea how much year to date they have spent on certain expenditures. Breaking these costs in to Direct Cost and Overhead or into various expense categories, can help you focus on tracking what is necessary to spend, and what is a discretionary spend.
2. Tracking your time
This is a very important function of any business owner. If you take 10 hours to create your sellable item, but only charge $10 for the item, then the clearly the labour costs far exceed the sales revenue (unless of course you wish to pay yourself well under the minimum wage). Tracking your time is a valuable way to assess if the business is actually profitable and could survive without your input.
3. Prioritise your savings
Paying a regular amount to a profit bank account before spending on your operating expenses is a newer school of thought. It comes from the principal that if you don’t see it in your business bank account-you can’t spend it. Also restricting or making it very difficult to access this profit account will mean that at the end of the financial year you have something to show for your efforts.
4. Paying yourself
Paying yourself a wage seems like a logical idea, but is not a common practice for most small businesses, especially sole traders. If you were working for someone in their business, the expectation would be that you would be paid, so why shouldn’t you expect to be paid yourself? A sole traders wage is classified as Drawings, but still represents payment for services and should be treated in the same manner as any other employee. This is; gross wages, tax deducted and a superannuation contribution- albeit administered in a different manner, it is still important that you treat yourself like you’d treat any employee. Establishing a regular payment to the owner’s personal bank account will eliminate the temptation to use business funds for personal use and also establish saving habits outside of the business. If your business is a tax structure like a company, a Director or related party should be entered as an employee and administered efficiently via Single Touch Payroll.
5. Pay your tax
If you are sole trader, you pay your tax directly to the ATO. In the first year, the ATO will not know how much profit you make so your tax should be set aside into a separate bank account on a regular basis. After lodgement of your first tax return (including business income), the ATO will most likely enter you into the Pay As You Go instalment system, which will require you to make a lump sum payment each quarter. Not paying or lodging your tax return on time, can create a perpetual problem, one which we have often helped clients (with discipline) to resolve. It’s very helpful to pay your tax quarterly- if not, you may be up for a large bill at the end of the financial year that you may not have the funds to pay for.