Pete Matthew is a multi award-winning podcaster, Husband and Dad, Chartered Financial Planner, a Certified Financial Planner (CFP) and Managing Director of Jacksons Wealth Management in Penzance, UK. Oh…and let’s not forget those amateur dramatics and musical productions too! Pete not only knows how to manage your business finances but also provides inspiration to so many of the Content Marketing Academy (CMA) members too.
So when Pete offered to get involved in our guest blog series, we very quickly said yes!
You see, we know that business owners struggle with money and we know that acting on the advice that Pete shares can have a massive impact to our business finances and personal finances too. He talks sense and he makes it easy, but I’ll let Pete persuade you himself.
If you’re in business, you need to deal with money…
You sell something to a customer, and they give you the dosh in return.
So far, so simple. Many business owners are superb at creating their product or service and fantastic at selling it, but then, when the money hits the account, it all goes a bit Pete Tong. They don’t keep adequate records, they forget to put money aside for tax, and all their bank statements get left in the envelopes they arrived in.
Recognise yourself yet? If so, don’t despair – you’re not alone. Quite the opposite, in fact. Many, many business owners are good at everything except money management.
Don’t be afraid
Let’s get one thing put to bed right away – money is not something to be afraid of. Like most things, a basic understanding of how money works can help clear the way to engaging with it.
There are a few basic things we need to get right, ideally from outset, in order to make the money flow easily into and through your business systems.
In order for money not to be a constant source of worry, there needs to be enough of it. Thank you, Captain Obvious. If there’s too little coming in, something’s got to give. Either you take home less for personal spending, or if you have staff you may have to lay them off. Worst case, you have to close down. No-one wants that.
So I’m going to assume that there’s enough coming in to keep the business afloat and to keep you in the manner to which you’ve become accustomed.
But it isn’t just the amount of money, it’s the smoothness of the flow that you need to try and control. Getting twenty grand in one month is great, but if it’s three months to your next inflow, and your costs are ten grand a month, you’re in trouble.
If your income stream is unpredictable, you need to try and get into a position where you put a buffer between you and that unpredictability.
The best way to do this is to have two bank accounts. I do this personally at home, and have done for years, and we also employ a version of this system in my business.
I suggest that you receive all your inflows into an IN account, and have all your costs coming out of a second, OUT account. Assuming your monthly costs are roughly the same each month, you should know what will be going out of the OUT account.
Set up a monthly transfer from your IN account to your OUT account of about 25% more than the level of your monthly costs. If you do this consistently for a year, you’ll end up with three months’ outgoings built up in your OUT account. You’ll essentially be spending the income from three months ago.
Remember, I’ve assumed you have enough coming in to sustain the business and a lifestyle for you. If things are a little tighter than that, then you’re going to have to knuckle down, and either reduce costs, or increase turnover to give yourself the slack to build up the buffer.
Very few costs truly come as a surprise to us. Even if a particular bill only comes once per year, it’s probably going to hit at about the same time every year, so we can plan for it.
Logically, we should divide the annual expense by twelve so that over a year, we will have saved enough to pay the bill when it arrives. But why not divide the cost by ten instead? Yes, your monthly savings will be a little bit higher, but you will build in some extra capacity in case the bill is bigger than expected.
Keep these regular savings in yet another account, if you can. Call it your BUDGET account, where you collect money for larger bills. Or you can just keep a running total in your budget software or spreadsheet so that you know how much of the money is earmarked for future spending.
There’s no such thing as an unexpected tax bill, not if you’re on top of things.
Tax is levied on profit. Yes, the definition of a profit can be weird sometimes, but if you’ve been in business for some time, you will have some idea about what profit you are expected to make, and therefore what tax you’re likely to pay.
If you’re brand new in business, then you need to be extra careful to make provision for tax from day one. If you have a business plan, then you can work to that. Whatever you think your profits are going to be, you need to put aside at least 20% for your tax bill, and possibly more, depending on the scale of the business. To be sure, put 30% of your profit away in an account for tax.
Tax is worked out differently depending on whether you’re a limited a company, a partnership or a sole trader. You need to educate yourself about your situation. Ask for an hour with your accountant and get them to explain it, or find a good book.
Like all your annual expenses, budget for tax and save for it each month using the divide by ten rule we covered earlier.
If you’re still trying to manage your business finances in Excel, stop right now. Sign up for Xero or FreeAgent and let great software do the heavy lifting for you. You can import your bank statements, and assign the income and expenses to categories. Then, the system will learn and auto-match the next time around, saving you valuable time.
Even better, these apps will give you a running tax total, so you can make sure you’re keeping enough aside to pay it. They can even submit your tax return for you, both personal and corporation tax, if applicable.
Better still, hire a bookkeeper who knows these systems and hand the whole thing over to them. That’s a good use for that extra money you’re saving each month, right..?
No-one else is responsible for the financial health of your business. It’s on your head; you must rise to the challenge.
You’re not too busy – the financial health of your business is dependent on you getting your head in the game.
You’re not unable – If you can run a business that creates and sells value to other people, you’re perfectly able to deal with this.
Stop making excuses and do it – you’ve got this.
CMA members should watch out for an upcoming webinar with Pete, where he will be going over more practical tips for how to get into a money mindset.
I’d love to hear your thoughts on this topic too.
- How do you feel about your business finances? Are you happy with how you manage your business finances?
- Do you have any top tips for managing your business finances?
Please share your experiences below and feel free to ask if you have any questions.
About Pete Matthew
Pete Matthew is a Chartered & Certified Financial Planner and MD of Jacksons Wealth Management in Penzance. He loves to make complex financial concepts simple for his clients, and for the rest of the world through his multi award-winning website and podcast, Meaningful Money
He’s married to Joanne, has two teenage daughters and a Jack Russell called Maisy.