Five mistakes most business leaders make with their finances

Many business owners have clear reasons for founding their firm – be it to launch a product or service that overcomes a fundamental problem, or to leave their own legacy or mark on the world.

Whatever the reason might be, financial reward remains a key driver for success in most cases.

However, when business leaders overcome the challenges of the start-up phase and unlock the potential to make more money, many often make mistakes that not only prevent them from building the company that they want to, but also from attaining the lifestyle that they always dreamed of before taking the plunge into the world of self-employment.

That said, here are five of the most common mistakes business owners make with regards to their finances.

Low salary and high dividends

For many years, accountants advised business owners to earn a minimal salary that took them into the National Insurance bracket, with the rest of their income supplemented by dividends. While this may have been effective 10 to 15 years ago when dividends were taxed at 0%, it simply isn’t anymore. There may still be some small tax savings in dividing income between low salary and high dividends, but they will undoubtedly be minimal – especially as everyone is required to pay tax on dividends received over £1,000 as of 2023/24.

What’s more, when it comes to borrowing, lenders will scrutinise the ratio of salary to dividend, where having a very low basic income could actually jeopardise eligibility. As such, business leaders should avoid taking this outdated approach.

Turnover instead of profit

For many business owners, turnover is their primary financial focus, which is a pointless exercise. After all, if you turn over £100 million but your costs are £101 million, you don’t actually have a viable business, and something needs to change to reduce your losses and start making profits. Moreover, when it comes to borrowing, lenders will review at least two years of your annual accounts, and having a loss-making business across both years will certainly hinder the outcome.

As the saying goes: ‘turnover is vanity, but profit is sanity’. In this sense, business leaders should be much more focused on making a profit rather than on their turnover. Doing so is much likely to ensure that your business is viable, and will be in a far better position to borrow as a result.

Minimalised profits

The financial approach taken by some business leaders – particularly those running a ‘lifestyle business’ – is to prioritise taking as much cost and expense out of the firm as possible to minimise profits and ultimately save tax. However, many business owners are unknowingly shooting themselves in the foot by doing so – especially when it comes to both personal and professional growth. There are a whole host of reasons why this is, but one of the most significant is that, when it comes to their borrowing/lending criteria, many lenders will consider annual profits. If you have minimal profits, this is unlikely to move the needle much and will generate little benefit and outcome as a result.

Therefore, business leaders should avoid taking cost and expense out of their company as a tax saving initiative, and instead recognise the ways how doing so could stand in the way of progress.

Annual vs. monthly accounts

The majority of business leaders, particularly those who run small-to-medium-sized enterprises [SMEs], will only take a look at their accounts on an annual basis, which means they have minimal insight into how their business is actually progressing.

By completing monthly management accounts, however, they can gain a clear picture on costs, sales, profits, etc., so that any clear mistakes or shortcomings can be quickly resurrected – and essentially be turned from a loss into profit. This aids both individual and business financial planning, while promoting longer-term success.

Failure to plan ahead

Ultimately, the main – and most severe – mistake that business owners make is failing to plan ahead. Too often, they are only focused on the ‘now’ in terms of costs and tax, and don’t pay enough attention to the life and business that they want to create.

As such, I encourage all the business owners who I mentor to begin with the end in mind, and reverse engineer sales and profits to create the life and business that they’ve always dreamed of. This comes right down to things like the ideal home that they want to purchase, as well as the mortgage required to achieve it. Whatever the end goal is, leaders need to have this clearly within their sights, without getting too bogged down in the here and now.

Avoiding financial fouls will drive business success

There is clearly a plethora of financial pitfalls that business owners can come up against, and being able to safely navigate these with confidence is what will set an entrepreneur apart from their peers. Taking an approach that encourages growth while avoiding focus on meaningless indicators like turnover will drive success, and open up exciting new opportunities for the business. Without a clear view of your accounts, it is impossible to know exactly where you are heading as a business, and this can make it extremely difficult to plot your next move.

Instead, business leaders should take full control of their finances, rejecting the temptation to minimise costs for tax incentives or take a low salary for high dividends, and focus their efforts on what can be done to make their business a viable one for many years to come.