The UK appears to have turned a real corner in the battle against COVID-19 thanks to the successful vaccination programme. As a result, the economy is predicted to grow by 7.25% in 2021 – its fastest rate in more than 70 years.
Nevertheless, this period of economic recovery could be a dangerous time for many small businesses, especially if they have had to take out loans or exhausted their cash reserves in an attempt to stay afloat during the pandemic. So, if you’re a small business owner, how can you ensure your business keeps trading through this period and prospers in the months and years ahead?
- Keep up-to-date and accurate accounts, with all transactions reconciled against your business bank accounts. This is made possible by cloud accounting software that connects to your online banking service. Don’t forget to also reconcile your PayPal and merchant accounts. Real-time accounting information will give you a realistic overview of how your business is performing.
- Save for taxes in a separate bank account. Not only will this mean you have the funds to pay your tax bill when it falls due, you may also be able to dip into the account in the event of an emergency. Just be sure to pay back any money taken.
- Set some money aside for emergencies. As the COVID-19 crisis has shown, the business environment can take a turn for the worst quite unexpectedly. Having cash set aside will allow both you and your business to withstand turbulent times. Make sure you understand your business’s fixed costs, including lease and rental commitments, since this will help you to work out how much money you should set aside. Ideally there should be enough to cover at least six months of expenses.
- Make use of automation. Automate as many routine tasks as possible. While automation does require some financial investment, it will free up your time to focus on marketing, and winning and retaining customers, which will help to drive profits in the long run.
- Ask your accountant to prepare management accounts and review them on a monthly basis. This will allow you to keep track of your business’s monthly profit and loss, as well as profitability by customer and product. If there are too many numbers, track a few Key Performance Indicators (KPIs) and ask your accountant to develop a dashboard for you. By actively monitoring your management accounts, you can boost your business’s resilience so that it can survive any short-term trading difficulties.
- Understand your business’s balance sheet. A balance sheet is effectively a summary of your business’s position. It lists the business’s assets, liabilities and shareholders’ equity at a specific point in time. When you understand your balance sheet, you understand what’s going on in your business, including the level of debt that it has, and the risks it is currently facing. Best practice is to plan your salary, dividends and drawings at the start of each financial and tax year. If you don’t understand your balance sheet – and don’t worry, many small business owners are in this position – simply ask your accountant to teach you how to read and understand your balance sheet.
- Avoid having an overdrawn director's loan account. This common situation arises when a director has taken more money out of a company than they have put in, not including dividends or salaries. In an insolvency situation, a director could be forced to repay their debt by the company’s creditors – which could potentially put the director at risk of personal bankruptcy, depending on their financial situation.
- Seek professional advice if you think your business may be trading insolvently. An insolvency practitioner can help you to close down a business in the most effective way, minimising risks such as personal bankruptcy. They will often offer an initial meeting either free of charge or at a reduced rate.
A great way to boost the resilience of your business in this period of economic recovery is to draw on the services of a management accountant. Even if you can’t afford to employ someone on a full-time basis, you may be able to hire a management accountant for one day per week or month. By building a strong working relationship with your management accountant, you will be better positioned to manage your current risks and plan for a better future.
Lorraine Ellison, FCMA, CGMA, MBA
Member in Practice