Now that you’re well into the swing of the new year, we want to follow up with some tips to help you get your business into the best place possible in 2021.
We recently ran a Facebook Live to talk our clients through these points to consider for the New Year. And though they will help you in 2021, you can also apply them to any new year, at any stage of your business. These are four universal tips to help you move forward, no matter what the previous year looked like.
Here’s what we shared:
1. Make the most of Xero to monitor, managing and maintaining your finances
We really believe the core of managing your finances is Xero. It’s a cloud accounting software that’s connected to your bank and linked to other apps like Dext (formerly Receipt Bank). Dext, for those who don’t know, is a brilliant app that allows you to take a quick photo of your receipt or invoices and quickly upload it to your Accounting software.
Xero and its ecosystem of apps allows you to keep on top of your finances really easily. And that’s a massively important thing to do. If you can see and understand your financial information, then you can use it to make better decisions in a more timely manner.
You won’t be left with a bag of receipts or an overflowing drawer that at some point (about four days before the deadline) you’re forced to drag out and process into a spreadsheet. When you’re only able to manage your numbers this way you’re not truly seeing them, or the good they could be doing, because you’re just typing numbers into a spreadsheet to avoid a penalty.
If you’ve got real time information, you can do useful things with it – like better manage your cash flow. With Xero, it’s really easy to plug in a payment system. So if you want to start charging by direct debit or want to be able to accept credit card payments, using something that connects straight to Xero makes that really easy. You can also make use of features like invoice reminders so you can chase overdue payments.
Just getting those processes in place will really free you up mentally. It will improve your financial position just by getting money into the business quicker and allowing you to see where money is going. Somebody (we forget who) once quite rightly said “If you can take a selfie, you can use Dext”. It’s probably much more useful than the selfie as well!
2. Use forecasts to look to the future, rather than simply learning from the past
If you’re getting your financial data regularly and keeping Xero up to date, you have access to historic information. The next point we want to make is – look to the future. Create forecasts and budgets and do some cash flow planning.
The best place to start is with your old school budget:
- Let’s start with your Profit & Loss, because that’s what most people know and love and can do quite easily.
- You can do your P&L in Xero using the budget manager. Here’s how.
- Take a look at the last year. Obviously looking back at 2020, you’ll likely find quite an exceptional year. However, your March, April, May time in 2020 is going to be similar to your 2021 January, February, March – because the ongoing lockdown restrictions mean it’s going to be quite a slow start to the year for many. This may help inform the coming months.
- Then start to look at other months – go back to 2019, have a look at them, see if you have any seasonal trends.
- Plug that into a budget, then you’ve got a nice P&L budget.
Once you have your P&L budget, you can start tweaking it. For example:
- Increase turnover by one percent. See what that does to the bottom line.
- If you think you need an extra staff member to facilitate that, increase by the amount it costs to bring someone in. There are calculators you can use online to try and work out how much someone on a £20 grand a year salary is going to cost you.
For some short term cash flow planning, we can sign you up for an app called Fluidly
Fluidly Lite is free and links to your Xero. You can input the budget and it will bring in some historic information and also include some AI information. So if you think your customers pay you in 30 days, for example, Fluidly will tell you if that’s true or not. It will make a prediction for you, giving you some short term cash flow planning.
And that will give you much more certain knowledge for the short term – showing you if you’ve got the cash. So if you deferred your VAT payment back in spring and this year, you know, you’re going to need to pay or put in a payment plan, you can put that into Fluidly and see how it’s going to affect your cash. So you know if you’re going to be running short or you’ll have a surplus (which would be a nice place to be).
If you need longer term cash flow planning, then we can help implement an app called Futrli.
Futrli is a little more complicated, because you need to use more assumptions of how people are paying, when they’re paying, and VAT. It’s something you’d need your Accountant to be involved in to help you get through. With our clients, we ask for the assumptions that we need and plug it into Fluidly for them, updating it on a monthly basis as we go through the year and their situation changes.
3. Consider the personal side of things: It’s always important to have a personal budget
Many of you may already have a personal budget or you’re used to using them. If you don’t have one already, now might be the time. We saw so many personal changes in 2020, it can make you feel more secure in the uncertainty to have a budget in place.
Maybe you’re not commuting anymore and you’re saving money that way. Maybe your income has dropped because you’ve been furloughed, maybe you’re feeling things are a little bit tighter this year.
Whatever has gone on, for most people there has been some change, and personal finances look and feel a bit different. So in amongst all of this thinking around your business and how that’s working, make sure you take some time to stop and think about the impacts personally around your finances.
- Is there room for you to save a bit more?
- Or if your family is okay but your business is struggling, are you able to potentially reduce what you take from the business?
Sometimes (especially in these times) we have to remember to put our own oxygen masks on first. Make sure you’re healthy and happy, because if you don’t take care of yourself, your business will suffer.
So make sure you’re spending a little bit of time thinking about your family, about the important things, and make sure you’re in a good place.
4. Take a tax review to see if you can extract more profit from the company
We run a service called a Tax Review, looking at lots of different areas to see how we can help you extract profits from the company.
- There may be reliefs that you’re not currently taking advantage of, for example, creative tax credits or research and development reliefs.
- We may look at extracting more profit to you or potentially looking at extracting it to different family members.
- We might talk about salaries and dividends as a starting point. But there are other ways in which you can look to extract value, like your pension.
There is a very long checklist that we go through, and we recommend taking a review like this once a year, or once every couple of years. Because things change! Tax laws change all the time, and there could be ways to bring down your tax bill or maximise reliefs that would give you more money to add into your personal budget (and enjoy!).
Think about what your goals and desires are long term
This information will be important for 2021, but also relevant and useful every year. If you’re proactively thinking about your business and your personal financial position, you can make use of all these different ways of getting money out of your business.
Think about what your goals and desires are, what the business goals are, what you want from the business. If the business is doing well and you don’t need cash right now, it’s still important to think about how you might want to extract money or get value out of the business long term in the most tax efficient way.