Your Money is Not Your Money!

In the bustling world of plumbing and heating businesses, a crucial lesson that can't be overstated is the importance of prudent financial management. The essence of business isn't just in making money but in keeping it too, and sometimes, that means recognising that not all the money in your business account is there for the taking. Suppliers, services, and yes, the ever-present taxman, all have a stake in your hard-earned revenue.

So, how does one navigate this complex financial landscape without getting lost in the numbers? It's simpler than you might think, and it all starts with a bit of organisation and foresight.

Understanding Your Burn Rate

First off, know your monthly burn rate. This isn't about the fuel you use on jobs but the total cost to keep your business running smoothly every month. Whether you're knee-deep in financial statements or prefer a once-a-year glance at your accounts, understanding your monthly expenses is crucial. This figure becomes the baseline for ensuring all your financial commitments, from direct debits to standing orders, are met without a hitch.

Dividing Your Profits Wisely

Once you're familiar with your expenses, any extra cash in the bank is considered profit. But hold on before you start dreaming of that new van or fancy toolkit. Remember, profits are taxable. Setting aside a portion for taxes now saves you from future headaches. For companies, corporation tax sits at 25% (for profits over £250,000), while sole traders need to account for both income tax and national insurance see this link for more details - https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past .

Here's where being smart about savings comes into play. Opening an interest-bearing savings account to stash away money for taxes is a savvy move. By the end of each month, transferring a calculated portion into this account ensures you're always ready for tax liabilites.

Paying Yourself and Planning Ahead

What's left after setting aside funds for taxes is yours to enjoy, right? Well, partially. While it's tempting to reward your hard work by transferring all remaining profits into your personal account, it's wise to leave some in the business. Unforeseen expenses are a reality in any business, and having a buffer can be a lifesaver. Deciding on a percentage to pay yourself while keeping the rest for emergencies or debt reduction can significantly improve your business's financial health over time.

VAT Registered Companies

For those registered for VAT, the principle remains the same, with the added step of allocating 20% of your turnover. Less 20% for VATable purchase / expenses to a savings account for VAT payments. This proactive approach ensures you're never caught off guard when VAT bills come due.

Embracing a Systemised Financial Approach

Adopting a structured method to manage your finances can transform your business. Separating funds into different 'pots' or accounts for operations, taxes, and reserves simplifies money management and provides clarity. By focusing on your cash flow based on actual bank balances rather than projected sales, you align your financial planning with reality, avoiding the pitfalls of relying on unpaid customer invoices.

Real-World Application

For plumbing and heating business owners, navigating financial management doesn't have to be a daunting task. By understanding your monthly expenses, judiciously dividing profits, and adopting a structured approach to your finances, you can achieve a balance that promotes both personal satisfaction and business growth. Regularly reviewing and adjusting these allocations in response to business performance ensures long-term success, making your financial management strategy a cornerstone of your business's stability and prosperity.

If you are looking for help and advice with getting your business finances in shape, contact us at info@togetherwecount.co.uk

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