A successful business needs to have at its core financial efficiency. This is necessary as a business can continue to function only if it has sufficient cash flow and alongside increasing revenue, efficiency is the other part of the cash flow equation.
Let’s look at a breakdown of how to achieve financial efficiency in the following four key areas of your business.
How a business is set up will have a big effect on how tax efficient it is. There is a choice of legal entity including: sole trader; a variety of partnerships; umbrella or limited company. All will offer pros and cons depending on your own personal situation and the type of business you want to build. They also all expose you to different levels of personal financial risk so make sure you carefully consider each option.
When it comes to questions of tax efficiency it can reap dividends to get sound expert advice early in the life of your business. While you may think you are saving money by doing everything yourself, a tax accountant can point out areas where savings can be made that you might not even be aware of, such as the expenses a business can legitimately claim. This can be the difference between being in profit or making a loss at year end.
A company can only claim to be efficient when it can demonstrate that it knows to the penny how much money has gone in and out of the business. A separate bank account, dedicated to the finances of the business, is vital if you don’t want business and personal expenditure to get intertwined and cause issues.
A full set of accounts should also be kept and if you run a limited company these will need to be submitted to Companies House on a yearly basis. However, even if you are set up under a different legal entity, you will need the records for your tax return.
If you employee people in your business you should also document all your policies and procedures, especially for financial issues such as pay, benefits and expenses so that everyone understands the needs of the business. Staff training may also be required in some areas, so that people understand how to comply with the policies.
Every type of business will have a set of different financial risks and the first step in mitigating these risks is to assess the business so you understand where they lie. This should include any issues relating to: legislation or business regulations; investments; personnel; insurance cover; technology; and disaster recovery. Once you have identified the risks either eliminate them or put in place processes which can be carried out should any of them materialise.
Keeping a close eye on your expenses is vital to the efficiency of any business.
- Premises: Consider a virtual or serviced office if you don’t want to commit to a long term lease or large overheads for rent
- Equipment: Lease instead of purchasing and consider buying second hand to save substantial amounts of money
- Staff: Don’t over commit in terms of payroll and consider freelance staff initially if you are not sure if you can sustain jobs in the long term
- Technology: If you or your finance department are keeping all your records in spreadsheets, leverage technology by using software which streamlines the accounts process and frees up time
- Credit Control: Keep on top of chasing invoices and make sure you are paid on time. If this is proving to be a big stumbling block in your business then outsource
- Travel: Consider whether business travel is necessary or whether you can hold meetings virtually via videoconference
- Marketing: Don’t skimp on one of your biggest assets, your website, but for marketing look to free sources such as social media which can help build your brand
These four areas should form the financial framework of your enterprise, one on which you can build a solid business. A lean, agile and efficient business, even if it is small, can often outperform a larger company, simply because those at the top know that nothing within the business is going to waste.