How to manage your business finances

As a business owner, it’s easy to focus on the product or service you’re delivering; that’s what’s making the money, after all. But without effective money management strategies, you can quickly find yourself in financial trouble.

Although business finances can be a dry topic, learning how to manage money in business is essential for any business owner.

This blog explores ten ways you can better manage your business finances.

Why money management is important

Not knowing how well your business performs can mean making business decisions based on unreliable data and guesswork. Without a clear picture of your finances, you can’t budget, forecast, or plan for future growth opportunities.

But thankfully, you can solve many cash flow problems with foresight and good money management practices.

Ten tips for effectively managing business finances

Here are ten things you can do to stay on top of your finances:

1. Set up a business bank account

Regardless of your business structure (sole trader, limited company, etc.), you should consider separating your business and personal finances. Having a business bank account makes you look more professional, but filling out your tax return has become much easier. You can see how much money comes in and out of your business account, giving you greater visibility over your income and expenses — which is essential when making business decisions.

2. Consider invoicing software

Using invoicing software helps you keep track of payments still to come in and payments made by customers or clients. The software can flag when invoices are overdue, which makes chasing debts more organised. Within the software, you can also easily access profit and loss reports, helping you understand your business finances at a glance — this means less admin work for you, too.

Sending a professional-looking invoice also helps customers take your business seriously.

3. Keep tax savings separate

It’s tempting to transfer all your income into your personal account, but saving a percentage of incoming payments in a separate savings account is good practice for tax purposes. The percentage you save depends on your earnings; the rates are currently 20%, 40% and 45%.

If you bundle your savings together, it becomes hard to determine which savings are for paying taxes and which are yours to spend as you wish. Saving your tax payments separately means paying your tax bill is stress-free each year — your future self will thank you.

4. Analyse your expenses

Signing up and paying for a marketing tool or boosting a social media ad here and there all inevitably adds up. That’s why analysing your expenses should be a task you do regularly. You might find you’re paying for a subscription you no longer use or need and can save yourself instant cash.

Managing business finances is all about understanding exactly what you’re spending out versus what you have coming in. If you’re facing tougher months, you can sit down and unsubscribe from these tools to save much-needed funds.

5. Sign up with an accountant

If you don’t have the time or headspace to deal with your accounts, you can pay an accountant to do it all for you. Sole traders can expect to pay around £400 a year, and limited companies can pay anything from £600 per year. Accountants can usually uncover claimable business expenses you hadn’t considered, saving you money on your tax bill.

Some accountants can offer their clients discounted invoice software subscriptions and cashback on bank accounts, so it’s worth shopping around.

6. Build a good credit score

A good business credit score means you’ll have better business finance options if you need them in the future. Let’s say in a few years, if you want to invest in your business and apply for a business loan, look to bring an investor on board, or if you want to take advantage of supplier financing to bulk buy inventory; the lender will want to check you’re a responsible and trustworthy borrower. This means they will run credit checks.

To maintain a good credit rating, pay supplier invoices on time, pay loan repayments on time, keep your credit information up-to-date with credit agencies and check your credit rating regularly.

7. Consider business loan options

Business loans are popular with UK SMEs, helping them manage short-term cash flow problems. Unpaid invoices meant that 25% of UK SMEs surveyed borrowed money in the 2022/23 financial year to keep operations up and running.

Business loans give you an instant working capital injection to give you financial breathing space, so you’re not worrying about how you will pay bills for the coming month. Use your loan to invest in marketing campaigns to reach new audiences or restock inventory for busy periods.

A flexible and affordable loan can help you reach your business goals faster — compare business loans for free with our comparison tool.

8. Collect debts owed to you

Keeping on top of when you’re owed money means you can chase the debt promptly — as soon as it’s overdue. If particular customers always pay late, consider implementing a payment plan, perhaps invoicing part of the amount upfront and raising the final invoice once your product or service is delivered.

You can never predict timely client payments, but by only working with reliable customers, you can minimise the need to chase invoice payments.

9. Assess your margins

You want to determine whether the product costs, time and energy are worth it for the price you’re charging your customers. If your margins are thin, i.e. you’re barely breaking even, consider increasing your prices (or reducing your expenses, or both!).

To calculate your sales margin, divide your net income (money made after expenses) by your total revenue (money made before deducting expenses).

There’s no one-size-fits-all approach to pricing your products, but it’s a good idea to check out the competition to determine average market pricing and take it from there.

Make sure you understand the difference between net and gross income before calculating your sales margin.

10. Pay yourself a wage

Although you might want to reinvest every penny you make into your business, it’s important to cover any personal expenses by paying yourself a wage. Going years without paying yourself anything can be demoralising and can affect how you live your life. I.e. without a regular income stream, you might struggle to apply for personal credit.

Before you go

Managing your business finances effectively can help you maintain financial stability, putting you in the best position to grow your business. If you’re looking for a cash injection to reach your business goals quicker, we work with trustworthy direct lenders offering fast, affordable and flexible financing options for small businesses.