06October
9 Financial Planning Tips Every Small Business Owner Should Know
Practical advice on building a realistic budget, planning income and expenditure, setting financial goals and forecasting profit.
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The Three Statements Behind Every Number
Before looking at individual figures, it helps to know where they come from. Every business number lives in one of three financial statements.
The Profit & Loss Account
Shows what you earned and what it cost to earn it over a period — usually a month or a year. Read it from the top: sales, then cost of sales, then overheads, ending with net profit.
- Answers
- Are we profitable?
- Period
- Month, quarter or year
- Watch
- Gross and net margin
- Common trap
- Profit is not cash
Tip: Compare each month with the same month last year, not just the previous month — it removes seasonal noise.
The Balance Sheet
A snapshot of what the business owns (assets) and owes (liabilities) on a single date. The difference is the owners' equity — what the business is worth on paper.
- Answers
- How strong are we?
- Period
- A single date
- Watch
- Current ratio
- Common trap
- Ignoring debts due soon
Tip: Look at current assets versus current liabilities: it shows whether you can cover bills due within the next year.
The Cash Flow Statement
Tracks actual money moving in and out of the bank, split into trading, investing and financing. It explains why your bank balance changed even when profit did not.
- Answers
- Where did the cash go?
- Period
- Month, quarter or year
- Watch
- Cash from trading
- Common trap
- Growth eating cash
Tip: If profit is rising but cash from trading is falling, check how quickly customers are paying you.
The 7 Numbers
Seven Numbers Every Owner Should Know
Each number comes with a simple formula and a practical tip. Open one at a time and try it with your own figures.
0Key numbers
0Finance degrees needed
The total value of sales before any costs are deducted.
Revenue = Units sold × Price
Tip: track revenue by product or customer group, not just in total — it shows where growth really comes from.
What is left after the direct costs of making or delivering your product or service.
Gross margin % = (Revenue − Cost of sales) ÷ Revenue × 100
Tip: a falling gross margin is often the earliest sign that prices need reviewing.
What remains after all costs, including overheads, have been paid.
Net profit = Gross profit − Overheads
Tip: review overheads as a percentage of revenue — it should fall as you grow.
Mark-up is added to cost; margin is a share of the selling price. They are not the same, and confusing them leads to under-pricing.
A 50% mark-up = a 33% margin
Tip: always set prices from the margin you need, not the mark-up you are used to.
The level of sales at which you cover all your costs — no profit, no loss.
Break-even sales = Fixed costs ÷ Gross margin %
Tip: recalculate break-even before any major new cost, such as a hire or a new lease.
How many months the business could keep going on its current cash if no new money came in.
Runway (months) = Cash in bank ÷ Average monthly net outflow
Tip: for businesses that are not yet profitable, this may be the single most important number to watch.
On average, how long customers take to pay you.
Debtor days = Trade debtors ÷ Annual credit sales × 365
Tip: if debtor days are higher than your payment terms, tighten your credit control.
Common Mistakes to Avoid
- Treating the bank balance as profit
- Confusing mark-up with margin when pricing
- Only looking at the numbers once a year
- Forgetting VAT is not your money
- Leaving your own pay out of the costs
Good Habits to Build
- Check your key numbers every month
- Ask your accountant to explain one figure each meeting
- Know your break-even before big decisions
- Compare months year on year
- Learn a little, often — ten minutes a week
This article is general information to help you think about your business finances. It is not regulated financial, tax or legal advice. For decisions specific to your situation, speak to a suitably qualified professional. See our Disclaimer.
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