When you’re running a small to medium-size business, it can feel like there’s always something demanding your attention on a daily basis. That can mean that the financial health of your business can occasionally take a backseat as more urgent demands jump to the forefront. But it’s worth regularly taking a beat to assess the overall health of your business – whether you’re a freelancer, contractor, independent retailer or otherwise – to make sure your finances are flowing smoothly.
Reviewing Cash Flow and Liquidity
Speaking of flow, a business’ cash flow is its lifeblood that keeps things afloat. You want a solid balance of money coming in and being paid out – so if you end up with a load of unpaid invoices locking up thousands of points, you might find it tricky to keep the lights on.
Monitor your cash flow weekly, not monthly. Track when money comes in versus when it goes out, and always maintain a buffer for unexpected expenses. Keeping three months’ worth of operating expenses readily available can tide you over in an emergency.
Analysing Profit Margins and Expenses
Profit margins tell the real story of your business health. Many SMEs focus solely on revenue growth, but growing broke is a real phenomenon. If you’re selling £100,000 worth of products but only keeping £5,000 after expenses, something needs addressing.
Review your margins quarterly and scrutinise every expense. You may have a number of things, like software subscriptions, which are barely being used and are eating into your profits. Zero-based budgeting can help to reassess your expenses, as you need to justify each one from scratch rather than assuming last year’s costs are still relevant.
Evaluating Debt and Financing Options
While debt is frequently demonised, at the end of the day it is a tool to be used. The question is whether you’re using it wisely. Make sure to review your debt-to-equity ratio regularly to see if you’re overleveraging – and if it’s taking more than 30% of your monthly income, it’s time for a full audit to uncover the deeper issues.
Shop around for better rates annually. The financing landscape changes constantly, and loyalty rarely pays in business banking. Plus there are alternative lending options that are well worth considering depending on your circumstances.
Staying Compliant with Tax Obligations
HMRC needs to be taken seriously – and they’re serious about taxes being paid on time. Set aside money for tax obligations, rather than trying to scrape things together in January. Use separate accounts for tax reserves so you’re not dipping into it, and consider quarterly reviews with an accountant who can spot potential issues or saving opportunities for you.
Assessing Insurance and Pension Coverage
Insurance is one of those things you can forget about until you really wish you had it. While it can feel like money disappearing into a black hole, you’ll be thankful you have it if anything ever happens. Professional indemnity, public liability, and cybersecurity insurance are all crucial for modern businesses to protect themselves. Don’t neglect pensions either – as the sooner you start contributing, the less painful it becomes.
Planning Ahead with Financial Forecasting
While the here and now is important, as is planning for what comes next. Running financial forecasts helps you set realistic projections for the next 12 months or further, with best-case and worst-case scenarios to help you prepare for different possibilities.
By keeping on top of these different areas of your finances, you’re giving your business the best chance at not just surviving – but thriving for the long term.
