Most small businesses fail because they run out of cash. It caught out a lot of people who couldn’t cope while they waited for covid funding came through. Hopefully we’ll never have to manage a global crisis of that magnitude again but there are many things that might go wrong for individuals. I’ll talk about business continuity planning separately as I just want to consider your bank balance today.
I recommend reading the first half of Profit First by Mike Michalowicz and I think I’ve written about it before. There are some good principles and the remaining chapters just go into more detail
I have a Starling account which comes with savings spaces and I do monthly management accounts on Xero so I try to ensure that I have the following saved:
- VAT per Xero
- Corporation Tax per Xero management accounts (or you can save 19% of your profit)
- 3 months of overheads in case of illness or crisis which can also be used to buffer any large or unexpected bills
- Dividends to pay myself later in the year
- Spare cash to pay into my pension later in the year to minimise my tax
I usually pay my suppliers immediately because, as a small business, it reduces my admin to only deal with each transaction once. You should ensure that you have enough funds to pay your suppliers on or before the due date. A business is insolvent if it can not pay its debts on time.
I also use a Starling account for my personal finances and I use my savings spaces for:
- 3 months of household costs in case of illness or crisis which buys me enough time to sort out alternatives
- Savings to replace my car every three years
- Savings for holidays each year and fun experiences such as watching musicals with my kids
- Income tax due on my dividends and other income not on PAYE.
It’s taken a long time to build up this financial security so don’t worry if you’re not there yet but, if you’d like a hand with making your business run more profitably, please give me a shout.