Sound money management is achieved through getting to grips with your business and personal finances combined with having the right mindset. So where do you start?
You alone are responsible for your finances. It’s okay to ask for help, but you need to do your utmost to understand your finances at a basic level. Using accountants and financial advisers gets you advice and recommendations, you still need to have some input.
Education, education, education
Tackling finances and achieving sound money management does not require years of experience nor require you to have a PhD. Read books on finance, read blogs, attend webinars and workshops. Every business owner should know the basics even if they outsource their book-keeping and accounting work.
If you are preparing your own accounting records then set aside some time in your diary to keep up to date. This can be weekly or monthly depending on the volume of transactions you have to deal with. If you do not schedule it in then it just won’t get done.
Keeping up to date financial information gives you a great feel for what is happening in your business, allowing you to make more informed decisions.
Do you need a business bank account? The short answer is NO. Best advice says YES, if it suits your business. Having a separate bank account helps in a number of ways: It helps keep your business affairs organised; It also helps with mindset as it helps you to think about your business as being separate from your personal affairs. Of course, if you run your business through a limited company then the business will definitely need it’s own bank account.
Business Versus Personal Expenses
Don’t mix your personal and business expenses. If you give your records to a book-keeper to sort out then they will be grateful if you didn’t waste their time by giving them your personal receipts as well. It will also save you some money as it will take your book-keeper less time to prepare your records if they don’t have to go through a huge wad of personal receipts.
Again it helps with mindset around your business and money if you think of your business expenses being separate from your personal expenses.
Understand Your Income
Do you know how much income you need to be earning each year to cover your minimum standard of living? Do you know what level of income you need each year to allow you the lifestyle you want?
Once you have some figures on income goals, then break down to monthly, then weekly and then daily. Once you have your income goals then track your income relentlessly. Keeping a simple spreadsheet, or a running total in your diary or journal will suffice…. just keep a track of it.
Business Plan & Budgets
Even the smallest business should have a plan. It only needs to be on one page – what do you want to achieve? what are you planning to do to achieve what you want? and how are going to manage your progress?
Once you have a plan, you need to add in some numbers, and that is where having a budget comes in. Seriously, not having a budget is like driving blindfolded!
A simple budget is just details of income you expect to receive from all sources, and a list of what you spend or plan to spend every month. The key is to create a list that is quite detailed so that you can really see where you spend your money.
If you don’t know what you are currently spending your money one, set aside some time to go through your bank statements and create a simple analysis of where you have spent your money. Look at three months worth of statements and then work out an average spend for each item, such as food, eating out, clothes, entertainment, phone, broadband etc..
Being frugal doesn’t mean you have to turn into a miserable cow, who spends no money. You just need to train yourself to only spend money on what you need to, and what will bring you closer to achieving your goals. This applies equally to business and personal spending.
You will find that most millionaire business owners are quite frugal.
Another great tip is to review your direct debit payments at least every six months on both your business and personal accounts, and make sure that all payments are still valid items of expenditure.
You should check your credit score at least every three to six months, and make sure that your credit file does not contain any incorrect facts about your finances.
Understand Your Tax Position
You need to remember, that if you have earnings (profits) over £11,500 then you will be paying income tax, as well as national insurance contributions. So not all of your income belongs to you, you need to save some in order to pay the taxman. Keeping a separate bank account and transferring money into the account every week or month is the best plan to keep this money out of your reach.
Understand Your Relationship With Money
Women in particular, generally have a very complex relationship with money. One of the keys to great money management is understanding that relationship with money and how it affects your everyday decision making. A great exercise is to journal about your early money memories and then see what those memories are telling you about how you now view money… Awareness is a great starting point to changing your relationship to one that is positive and supportive.
Knowing what triggers you to splurge money is a must if you want to be able to spend more responsibly. Remember, ‘retail therapy’ is a myth… it doesn’t provide any cures. It’s a plaster at best.
Don’t believe me, then just think about what you would take with you if your house was on fire. I bet your clothes, shoes and handbags and all those other things you buy when tying to make yourself feel better, aren’t on your list of real priorities!
Hope you have found these core concepts of money management useful as a starting point. For more hints and tips then please follow my Facebook page.