How to find financial freedom as a small business owner

Owning a small business comes with its share of financial responsibilities. From managing cash flow to budgeting for expenses, it's easy to feel overwhelmed and trapped in a cycle of financial stress.

But many successful business owners have found a way to break free from these constraints and achieve true financial freedom.

If you want to find lasting financial stability with your business, you're in the right place. In this blog, we explore some practical tips and strategies that can help you better manage your business funds and clear that path towards financial freedom.

What is financial freedom?

As a small business owner, financial freedom means having complete control over your business finances and being able to make financial decisions without constraints.

It also means having a sustainable and profitable business that allows you to live comfortably, meet your financial goals, and have the chance to pursue ambitions both personally and professionally.

To find financial freedom, you need enough stability to weather unexpected challenges and downturns in the market. The key to this is:

• effective money management

• making smart financial investments

• having a solid understanding of the market and industry in which your business operates

Things that get in the way of financial freedom

There are a number of common obstacles that can stop you finding financial freedom, which we explore below. But the good news is that, once you know what they are, you can take steps to overcome them.

A lack of financial planning and budgeting

Without a clear financial plan and budget, it can be difficult to track expenses, monitor your cash flow and make informed decisions around your business finances. As a result, you might overspend, waste money, or become financially unstable as a business.

• How to overcome this obstacle: Be sure to make financial planning and budgeting a priority. Understanding your financial situation and being able to make informed financial decisions is vital. If you need to, seek advice from financial professionals such as accountants, bookkeepers or financial advisers.

Having too much debt

Excessive debt can put a strain on your cash flow and make you less able to invest in your business growth. High interest rates and strict repayment terms on loans and borrowings can also eat into your profits and stop you finding financial stability over the long term.

• How to overcome this obstacle: Work to keep business debt as low as possible and develop a plan for managing and reducing your existing debt.

Inconsistent or unpredictable cash flow

When your revenue rises and falls, it can make it difficult to cover expenses, meet your financial obligations and make strategic investments.

• How to overcome this obstacle: Devise ways to boost your cash flow, such as offering incentives for early payments, diversifying your streams of income (see below), or improving your methods for collecting money you're owed.

A lack of diverse income streams

Relying too heavily on a single source of income can harm your business finances and leave you vulnerable to economic downturns or changes in the market.

• How to overcome this obstacle: Look at ways to generate revenue in other areas. For example, that might mean expanding into new markets or offering new products and services.

How to achieve financial freedom as a small business owner

In the webinar below, Aberdeen-based accountant and Enterprise Nation adviser Susan Crichton shares her two keys to finding financial freedom as a small business owner:

• Using accounting software

• Finding ways to reduce "money leaks" in your business

Key to financial freedom #1: Use accounting software

Part of building financial freedom is finding a good accounting software package. This will free up so much of your time because it automates everything for you, including all those repetitive tasks you dislike.

You don't want to be putting things into an Excel spreadsheet, or printing off invoices and sticking them in a folder. It's both inefficient and bad for the environment.

Save time

A lot of accounting tools let you upload photos of invoices from your phone directly to the software. Or, if you receive a lot of invoices by email, you can redirect them straight from your inbox to your accounting package.

And, handily, once the software has populated all the necessary information, it will remember it for the future, saving you lots of admin time in the process.

Link your bank account

Your accounting software will have a dashboard from which you manage all your accounting tasks. One useful feature is being able to link your bank account to the software, so everything's done in real time.

You can see who owes you money and who you owe money to. You can monitor how your cash flow is doing. And you can connect your sales and purchases with the relevant invoices, so everything is linked and recorded accurately.

Create profit and loss reports

Accounting software lets you generate reports, and you can create a profit and loss report at any time. This is a great way to see at a glance whether your business is making money. And so important, given that most failing businesses do so because of cash flow. They might be profitable, but they just don't have the ready cash they need.

• With your profit and loss account, you can look at the sales invoices you've sent out and what's called "cost of sales". This is the expenses that relate directly to your sales.

  Say, for example, you're a manufacturer and you have to buy parts to make the product. That would go in cost of sales. If you're in the retail industry and you have staff who sell the products for you, those direct costs would go into cost of sales.

• As well as your sales and cost of sales, you have what's known as your "gross profit". You can then work out your "gross profit margin", which is your gross profit divided by your sales.

  This is a really interesting figure to look at, because if you go on to Google, you can find out what the gross profit should be for your industry and type of business.

  And that will give you an idea of whether you have your pricing right. If your gross profit margin is less than the industry norm, you know that your pricing's out somehow, and perhaps you need to look at it.

Managing your profits

The profit you see in your profit and loss reports should match the money you have in the bank. However, that doesn't always apply.

Maybe you've taken that profit and bought some assets. Maybe you've paid all your creditors, you've repaid a loan or you've paid back the people who invested in your business to start with, like family and friends. Consequently, the profit in your reports might not represent the amount sitting in your bank account.

But let's say it does. Say you've made a profit of £1,000 and you have £1,000 in the bank. You want to buy some new equipment, or you want to take on a member of staff, but you're worried about the costs attached to that. You don't want to take on debt to buy the new equipment, and you don't want to hire a new employee only to find you lack the financial resources to pay their wages every month.

In this case, you should set up another bank account and every month pay in a certain amount of money. In three months' time, you'll have the money to buy the equipment. In six months' time, you'll have enough to cover an employee's wages for three months. It's all about careful management and forethought.

Working with an accountant

If you've hired an accountant, you can have them log in to your accounting software and tell you how much tax you'll need to pay. They can advise you on ways to save on tax, whether you should be buying assets or making investments, or whether it would benefit you to recruit more staff.

Key to financial freedom #2: Plugging money leaks

What are money leaks?

Every business has them. A money leak is business spending which is neither 100% necessary nor delivering a positive return in terms of money or time.

How do I find money leaks?

The only way to find money leaks is in your bank account. If you've only been in business six months, or even three months, you need to study your bank statements for that period. If you've been running for several years, you should look at the statements for last year.

If you have online banking, you can download your statements as an Excel spreadsheet. Once you've done that, go through each payment transaction and ask whether they are 100% necessary for the business. Are they giving you a positive return in terms of money or time?

Highlight everything that's definitely 100% necessary and delivering a positive return. Then go back and look at everything you haven't highlighted. Ask whether it's worth keeping them, or whether you'd rather have that money so you can dedicate it to something else.

Examples of money leaks

Staff

Say your business has three full-time employees:

• John, who handles your sales

• Jane, who works on reception and does your admin

• Frances, who does your accounts and bookkeeping

You must look at all three and ask whether they're 100% necessary for your business. Are they delivering a positive return in terms of money or time?

• Is John 100% necessary? Is he delivering a positive return in terms of money or time?

  • You might think yes, because you need someone selling your products.

    But is the money you're spending on John's wages coming back into the business in the form of sales? (If he's a salesman, you should be looking at three or four times his salary.) If he's not delivering a positive return in terms of money, you need to decide whether to keep him on.

• Is Jane 100% necessary? Is she delivering a positive return in terms of money or time?

  • You might think yes, because she takes away the admin burden and gives you the time you need to run the business. She might not be delivering a positive return in terms of money, but she is delivering a positive return in terms of time.

• Is Frances 100% necessary? Is she delivering a positive return in terms of money or time?

  • Because she's on top of your suppliers, looking at your utilities, phone and internet and getting the best rates for you, she's delivering a positive return in terms of money.

    But she's also delivering a positive return in terms of time, because you're not having to do it yourself. She's freeing up your time for other, more urgent areas of the business.

Subscriptions and ongoing payments

Staff is one potential money leak, but you may look at your bank account and notice you have a subscription for £25 a month. You realise that you signed up for a free trial but didn't cancel the subscription and after 30 days the company automatically started taking the direct debit. You forgot all about it!

If you find that you don't use the thing you signed up for, that means it's neither 100% necessary for your business nor making a positive return. So why are you allocating vital financial resources to it?

The advantages of pots and separate bank accounts

When you've found the money leaks, your next step is to take that money and put it into a separate pot. Then you need to decide what you'll use it for.

For example, you might want to set up a podcast to market your business. That's going to involve investing in equipment, getting an editor, buying software, promoting the podcast on social media – all of which will add to your outgoings.

Work out how much all of that will cost you each month. If it's the same as the money you've put aside after plugging your money leaks, great! You can use that money to start the podcast.

If it'll cost more than the amount in your pot, set up a separate bank account called "Podcast" and pay in the savings until you have enough money to cover the costs of the podcast.

The trick is to have separate bank accounts for your biggest money leaks. One problem might be if you have debt, like an overdraft. You might be tempted to use the money saved from the leaks to clear your overdraft.

Instead, consider setting up a separate pot called "Overdraft", putting in the savings every month, and then every three months transferring it out to pay off some of your overdraft. But be disciplined. If you're likely to reduce your overdraft then start spending it again, wait until you have enough money to pay off your overdraft in full and do it all in one go.

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