Small Business Owners: 7 Essential Tips for Managing Your Financials and Team

Working for a small company typically means you have to wear several hats. There are more roles to perform than people; this results in me being a project manager and a business operations manager for our firm. Because we are small, the operations manager role covers some aspects of human resources, finance and office facilities. I have little practical experience in these areas, so the learning curve has been steep and, on occasion, stressful.

When I first started in the operations role, it would have been helpful to learn some lessons from others in a similar situation. But I could not find any articles. This post aims to address this need for more information. I want to share my experiences, particularly the areas I’ve found challenging and the critical lessons learned. I hope you find them useful.

First, some background

I work for a small UK-based IT consultancy. We are based in the southeast of England. We are made up of 6 permanent employees (including directors). We also employ freelance contractors as business demand flexes. Annual turnover is seven figures, and profit margins are average for the sector.

The six employees have all worked together in other organisations, so we know each other. Of the employees, four are directors and founders of the firm. The contractors tend to be people we have worked with previously.

The business model is a standard consultancy gig. We sell our technical expertise to customers as time or packaged services.

Lesson 1: Challenge every cost

Control costs all the time. Especially if the firm is still in a high cost, push for revenue growth phase. Each business will have its own cadence for costs. Stick close to the bank account and the accounting software to become familiar with the outgoings and patterns.

I planned and tracked every cost during my first year of company operation. This is a considerable undertaking. However, it made me familiar with the company’s cost profile. I saw all the costs and was able to challenge anything that I didn’t understand.

This practice also disciplined the managers in making purchases. They got used to me querying costs and pushing back if needed. Eventually, they started asking for my approval before any purchase.

Here are some other financial practices I have found useful.

Reoccurring costs and subscriptions. Every business has reoccurring costs; they can’t be avoided. However, they should still be challenged. These costs will leave the bank account every month or quarter and become the fabric of the company’s cost structure, so don’t accept them as a given. Periodically review reoccurring expenses, especially subscriptions. Is the subscription still used? Can you turn off the subscription for a few months until it is used again? I do this with my personal Netflix subscription.
Allowable expenses. In the UK, HMRC has many rules regarding what can and cannot be allowable business expenses. Make sure you are familiar with the rules. For example, if employees work late in the office and eat in a restaurant in the evening. A restaurant meal is not an allowable HMRC business expense. However, a takeaway meal eaten in the office is permissible. Of course, in a small company, you can set the rules for what expenses employees can reclaim, and the restaurant meal could have been reimbursed. However, the reimbursement would need to be declared to HMRC because the repayment would be treated as taxable income. Most businesses decide against this due to the administration of tracking these costs.
Use accounting software. Track all the costs and revenue in an accounting package like Xero or QuickBooks. Don’t use a spreadsheet. The accounting packages are designed for non-accountant use. They link to the company’s bank account and allow costs to be categorised as they happen. Reports are available for analysis, and they permit your accountant to have access to prepare the final year accounts and perform periodic reviews.
Have an accountant. Finally, retain an accountant for the end-of-year tax submissions, to review transactions and provide ongoing general financial advice.

Lesson 2: Offices are expensive

We rented our first office space in mid-2021. It was a small office in a multiple-office building. Later, in 2022, we moved to a larger space in a similar building about 5 miles from the first office.

Both the offices are fit for purpose in out-of-town or near-town areas. The first office was furnished. The second was not furnished, so we purchased desks, chairs, a coffee machine, whiteboards, etc. These are in addition to the IT tools we need to perform our jobs (laptops, screens, data connection, etc.) These additional office support costs can soon add up.

Monthly rental and service charges are kept to a minimum but are still significant, amounting to approximately 25% of our gross profit. In other words, we reduce our profit by 25% to have an office space.

That large figure begs the question, do we get 25% or more profit because we have an office? The answer is definitely not. I can’t evidence it, but I wonder if the office adds much to our revenue and profits.

So, why do we have one? Many organisations like ours work entirely remotely. Indeed, we work remotely with our customers and rarely host customers in our office.

The answer is more nuanced than profit and is two-fold.

Firstly, many of the team, especially the core developers, find working in the same space promotes better communication, knowledge sharing and problem-solving. They are better at their jobs because they sit with each other.
Secondly, only some people’s homes or lives are set up for remote work. If space is limited, working at home can be stressful. Also, the office may be a source of face-to-face human interaction for staff living alone that can’t be replicated on a virtual call.

So, for us, the expense of an office is worthwhile. But that might not be the case for all. If the need for an office is marginal, I would opt for fully remote; an increased profit margin will thank you for the reduced expenses.

Lesson 3: People take time to manage

We are a small company of about ten people. Yet, the time needed to communicate and manage is much longer than expected. Daniel Priestley [https://danielpriestley.com/] talks about a team of fewer than 12 resources being self-managing. I have yet to experience this; far from it. In fact, because everybody is interested in all aspects of the firm, the communications needed are more than working for a large corporation.

This is down to having several founders, all with a keen interest in running the firm. We’ll experiment with different ways of working to get closer to the self-managing team communications level.

Lesson 4: Don’t ignore the HR stuff

It is easy to dismiss the Human Resources aspects of running a small company as overly bureaucratic and politically correct time-wasting. And some processes might be. But some are very important and carry legal obligations in the UK.

All employees need an employment contract, even directors. Directors have a contract called a service agreement. Both are legally required.

Employees have a minimum annual holiday allowance; for the UK, it’s 27 days, including public holidays. Most companies provide employees with 25 days of yearly holiday in addition to the public holidays. This gives a total of 32 days holiday per year. If your firm operates a holiday buy-back practice, the total yearly holiday (including public holidays) allocated to each employee (or director) must be more than 27 days after the buy-back.

The director service agreements and employee contracts may need professional legal advice, especially if they are nonstandard. Alternatively, there are templates online, or you can repurpose existing examples if you have any.

If you don’t have those documents, and we didn’t for an extended period, get them in place as quickly as possible. They safeguard the business and the employees from misunderstandings and disagreements. So, it is a win for both parties.

Lesson 5: Think hard about salaries

When employees are taken on by your firm, you will agree on a basic salary. A salary is a significant commitment for a company and should not be entered into lightly.

Most people have a choice to be an employee or a freelancer. Many choose the employee route because they want security and a steady income. They want this so they can make financial commitments, like a mortgage or car loan. So, employees will take on commitments based on the salary you pay. As a result, the wage becomes a necessity, and many will fund lifestyles based on their salary.

Photo by Alicia Christin Gerald on Unsplash

For the business, if things get tough and revenue decreases, you cannot reduce salaries to fit a different economic landscape. The employee needs that salary level. Indeed, they are employees instead of freelancers because they want security and a steady income. This is an expectation of employees.

As a result, you can’t mess with salaries. You have to treat them as an ongoing fixed cost.

What does this mean for how to operate a company?

Don’t overpay. When you have employees, pay them well, pay them what they are worth, and pay what the market demands. If the business is doing very well when you engage the employee, don’t overpay because the cash is available; it might not be in the future.
Remember tax and pension. In the UK, employers pay national insurance (NI) contributions for each employee as a percentage of salary. The rules vary; I tend to work on a figure of 14%. In addition, the employer must contribute to employee pensions (alongside the employee). Again, the rules vary; as a minimum, I would budget 5% per employee. So roughly, add 20% to the agreed salary for NI and pension to gauge the total employee salary cost.
Have a reserve. I recently read a story that Bill Gates aimed to have reserves in Microsoft to cover the employee salary bill for one year. So, if Microsoft earned no revenue for one year, they could still meet their salary commitments. This is a good target to aim for. However, despite its simplicity, it takes work. That amount of cash is likely to be hard to accumulate and must be continually adjusted as employees are taken on and given pay rises.

The aim is not to let employees go because of the normal variations in revenue. Salary costs soon add up. Think carefully about the worst-case scenario; having a reserve to pay wages can help maintain the company’s salary commitment to employees.

Lesson 6: Pensions

As discussed briefly in the salary section, employers are mandated to provide a workplace pension in the UK. The employer and employees must contribute to the pension scheme. Usually, the employee contributes 4% or 5%, which the employer matches. Rules and schemes vary, with some employers being more generous.

A workplace pension scheme is legally required to be set up, and contributions are to commence three months after the first employee joins the payroll. The scheme must be registered with the pensions regulator, and some standard communications must be sent to the employees to tell them about their pension options and rights. Then, monthly payments must be made to the pension schedule based on that month’s payroll.

As a result, there is a lot of initial administration, followed by monthly tasks of calculating the pension contributions based on that month’s payroll and transferring the contributions (both employer and employee) to your pension provider.

I found few helpful documents online. So, I will write up the initial pension scheme setup steps and monthly administrative tasks and link to the article here when it’s available.

Lesson 7: It’s all about the bottom line

Always keep your eye on the bottom line. Every month, calculate the firm’s cash flow position. How much money came in vs how much money was spent. If the difference is positive every month, that is perfect. However, the company regularly spends more than revenue coming in, then monitor the bank balance to ensure you have sufficient funds to meet the firm’s future expenses, like salaries, especially if there is a small cash reserve.

Relentless focus on cash flow (cash in and out) and the bank balance is paramount in the early stages of every business, where cash reserves are likely to be small and always under pressure.

Wrap up

Setting up and running any company will be unique. So, my journey and lessons learned will be different from others. However, unless you are a cash-rich organisation, challenging every significant and reoccurring expense, like office and salaries, is good advice for all firms.

In most knowledge-based small enterprises, there are really only two areas a business operation manager needs to manage: