10 March 2022
7 ways to financially future proof your business
After times of uncertainty, it can often feel like you’ve lost some control of your business finances or your financial future. Planning now how to future proof your finances, can help you feel more secure about the future of your business and give you the confidence to continue with growth plans and investment.
Here’s my seven tips on taking more control of your business finances:
1. Base your spending on facts, not dreams
Don’t base your future spending on forecasts which, at best, may be slightly misleading but at worst, may paint a totally different picture of your business. When things are going well, some business owners tend to think that things will never drop-off and spend money they are projecting to make, rather than what they actually have. This spending trend can result in a business overtrading and exposing itself to risk if, and often when, trading doesn’t go quite according to plan
2. Build up a ‘rainy day’ working capital fund
A good practice is to try to build up 2/3 months’ worth of operating expenses in the business to protect you from risk if turnover drops. This fund would give you the chance to correct any areas that may not be performing (such as sales opportunities) before the cash runs dry. This figure should be on top of providing for tax liabilities that also accrue in your business (such as VAT and Corporation Tax that only arise periodically). It is this kind of liquidity that allows your business to survive the harder times and thrive when opportunities present themselves as they have the financial freedom to pursue them.
3. Diversify your income
A good way to ‘hedge your bets’ is to develop multiple income streams in your business. If one area of the business is not performing as expected, the diversification of income principal means that another area will take some of the slack. However, caution should be exercised to ensure that the core business remains strong and brand values are not compromised too much, as this could impact all income streams simultaneously.
4. Intelligently finance your business
Often, when starting-up, owners may borrow money from all manner of sources to get the business off the ground. This could be from a range of sources such as personal funds, generous family members or the bank. Whatever it had taken to get the business to where it is, often more cash is needed to take the next step and ensuring that the best deals are sought out is vital to making sure the money has the biggest impact on your business. Maybe you bootstrapped your way through the first few years, or borrowed money from family members, or took a loan from the bank. However you got here, you’ll likely need some cash to go further – and you’ll need that cash to be cheap.
Scouring the market for opportunities to restructure any debts at the lowest possible rate is important and can become easier as a business becomes more established and its credit rating increases. Other routes such as private equity investments can also be considered, although it should be noted that ownership is often diluted in these cases.
5. Monitor your costs
It sounds obvious, but often this important area of cash preservation can be overlooked. Regular reviews of expenditure to ensure the most cost-effective solution is being utilised should be undertaken, and consolidation of costs (such as multiple insurances or software licenses that overlap) should be taken advantage of. Make yourself accountable to review the spend in your business regularly by running reports from your accountancy software and tracking where your money is going and take action on any negative trends that may be arising.
6. Make sure you have insured against risk
Having robust insurance policies in place for your activities is vital should a significant incident happen in your business. Liability insurances can help mitigate risks associated with your activities and income protection and life insurances can ensure that you or your loved ones are protected should they be needed. Key man and shareholder policies can protect a business by covering the costs should you need to replace an insured key worker and some shareholder policies can even ensure that a business doesn’t fall into the hands of an unsuitable owner should a shareholder pass away. These premiums can offer you peace of mind that the business will not be interrupted, or worse, if a significant incident arises.
7. Plan succession
Most people have personal aspirations for when they retire, but many don’t think about what will happen to the business. Having a plan in place can help employees, customers, investors and the community at large continue to have confidence in your business and ultimately continue to use your services. By having a plan well in advance, exit routes can be explored and the tax consequences of a sale, which can be significant, can be prepared for.
Conclusion
As recent times have shown, it is impossible to plan for every eventuality that can arise in business. However, with some good planning and savvy decisions, you can give yourself a fighting chance of getting through the hardest times in business and take advantage of key opportunities as they arise.
To find out more about financially future proofing your business, contact us today at our offices in Chester, Wirral or Liverpool.
