What do you need to do to keep track of your business finances?

Few people go into business to do the books and many find keeping their accounts up to date a pain.

Emma James
Emma James

We asked The Number Ninja Emma James about how to keep track of business finances, her recommendations for software to make it easier and which numbers really matter.

This is a transcript of a live conversation. 

Keep things simple

Emma James I’d always recommend a separate bank account, even for a sole trader. If you have a lot of foreign currency transactions and prefer to use a separate account for this (I use Revolut as their exchange rates are excellent), then keep this separate to personal use. Paypal can be a nightmare, so have separate accounts for business and personal. It makes it a million times easier in the long run, which in turn means you’re much more likely to want to spend time keeping your accounts up to date.

Ann Hawkins Do you recommend a business bank card for all cash payments so everything appears on the same statement and scanning receipts with an app instead of keeping paper ones?

Emma James I scan everything. Apps such as AutoEntry or ReceiptBank are great as they link directly with Xero and QBO. You can also scan directly with the Xero and QBO apps.

How to budget for your business

Q. As a non-number ninja, how do I come up with a realistic budget forecast for the next 12 months?

Emma James I look at 3 main areas: sales, profit and loss, cashflow. For each of the next 12 months what do you expect your sales and costs to be (don’t forget that some costs will increase as a direct result of more sales)? You’ll have some costs that are fixed, that you have to pay no matter what, and others that are a bit more optional.

Next think about your plans for the next year, if you think you’ll want to take on an office put some guide costs in their so you can see what effect that has. Your profit and loss forecast will tell you what your expected profit will be (and you can then work out likely tax), whereas your cashflow forecast will tell you when you can actually afford certain things.

As for realistic, the key is to review regularly. The whole point is that they’re there to help guide you, if you take on an employee partway through the year your costs will definitely increase, as will your sales most likely, so if you hadn’t expected this when you originally forecast you need to update accordingly so that you’re taking this into consideration for the rest of the year.

There’s a bit more to it than this, as some business have the option of just basing everything on cash, but essentially you’ve got the cash basis which is when the money actually physically enters or leaves your basis (your cashflow), and the accruals basis which is when the business is affected by the transaction. Say you buy a ticket to a conference in January but the conference is in April, this hits your cash flow in January, but you don’t get the benefit until April so that’s when it should show on your profit and loss.

Q. Is there a set proportion of income I should be setting aside for tax etc?

Emma James For tax, it really depends on how much detail you want to go into and how much time you want to spend on this. As a sole trader, if you put aside 20% of your sales you’ll definitely have more than enough come tax time. I like to look at my profit on a weekly basis and work it out in more detail, but I love looking at this sort of stuff! If you’re on top of your bookkeeping you can look at your profit regularly and do a more detailed estimation.

Q. What’s the easiest way of keeping track of what’s coming in and going out? I currently have a spreadsheet.

Emma James For keeping track of incomings and outgoings I would definitely recommend software, such as Xero or Quickbooks. Spreadsheets are perfectly fine, but Xero/QBO, etc can do so much more: link directly with your bank, create your invoices, email your invoices, automatically remind your clients that they need to pay, etc. As well as all of the reporting information you get. I love a good spreadsheet, but I’d struggle to run my business without Xero as everything is always up to date, ready for me to do my daily review of my accounts. You can also take photographs of your receipts on the go and send these straight to Xero/QBO, which you can’t with a spreadsheet.

How to get to grips with cashflow

Ann Hawkins The thing I see people struggling with is cash flow – what’s a simple way of checking what is due in and out and how much cash is available at any one point?

Emma James This is something that a lot of the major accounts software lacks. Accounting is generally backward looking, which is reflected in the software. I use software that integrates with Xero for forecasting, so you’re not having to enter information twice, but you get that forward look. I use Dryrun, but other are available. Xero and QBO both have great reports that show which sales invoices have not yet been paid, and if you have your bank feeding into it too you’ll always know what is expected to come in and go out. Having said that, I do like a spreadsheet for this too, although that’s a bit more effort as you have to update manually. It really depends on what you’re going to use and update regularly and what you prefer.

Q. Cashflow forecast is something I just don’t understand. I have to use QBO because that’s what my accountant uses and it is always up to date. But I have no idea how to do a cashflow forecast.

Emma James Do you have access to something like a cash summary report in QBO? That will give you the historical information, which you can then use to inform your forecast. For example say you issue your sales invoices on 14 day terms, but 80% of your clients actually pay after 45 days, then this is going to have a huge impact on when the money will actually come in. Start with sales and when you’re likely to actually receive the money, then look at your costs and when you actually pay them.

There should also be a report that will tell you how quickly (or not) your clients pay their invoices. This will help with cashflow forecasting, as unfortunately too many businesses pay no attention to due dates and pay whenever they fancy.

Can you really forecast cashflow over 12 months?

Q. This is my question too. Moving over to Xero has definitely helped, but I’m not sure how possible it is to look at cashflow for the next 12 months…?

Emma James The dashboard will give you basic cashflow information, in terms of when your sales invoices are due and when you need to pay for your purchases. But forecasting isn’t the main focus of accounting software, so is generally handled outside of things like Xero. The easiest way of doing it is with a spreadsheet, and using the Xero reports to update this.

Q. Emma, do you have an example of a spreadsheet you could share? I have no idea what goes on a cashflow forecast spreadsheet. But I do now understand your point about accounts packages look backwards and forecasting looks forwards.

Emma James Freeagent have quite a good basic template https://www.freeagent.com/guides/cash-flow-forecast/

If you want software, I’d suggest looking at Dryrun, Float and Spotlight.

Q.  I find that people are genuinely scared of preparing a cash flow forecast either because they don’t understand the “how” or they’re concerned about making proper use of the data they see when monitoring. A forecast is only useful if it’s regularly reviewed and used to be aware of potential cash shortfalls thus allowing you to manage the problem well in advance of it being a problem.

Emma James There’s no point in creating a forecast if you don’t review it and update regularly. I look at mine every day, and always scrutinise it before I make a decision such as whether to go to a conference or offer a new service that will insure additional costs.

Xero: can one account do two businesses?

Q.  Can I run multiple (two) businesses on the one account or do I need two separate accounts? As you can tell I’m only just looking at this so excuse the novice question.

Emma James You’ll need a separate subscription for each company, but you can do this through the same billing account and you’d only have one log-in (you swap companies using the hamburger in the top left). I’m pretty sure you get a discounted subscription on the second company, but they may have stopped this now.

I’ve assumed that the businesses will be completely separate, e.g. with their own bank accounts and registered as separate companies. If that’s not the case, you could use the one Xero account and use a tracking category to split the income and costs for each. But I’d only recommend that if it’s another revenue stream of the one company rather than separate businesses.

Would you like to know more? Get in touch with Emma James.