When it comes to business growth, many owners focus on marketing, operations, and sales. While these areas are crucial, one of the most overlooked aspects is the finance function. Without a strong financial foundation, even the most promising business can falter. In this post, we’ll explore why you should invest 1.5-2.5% of your turnover into your finance function, and how doing so can save your business from costly mistakes.
The finance function encompasses everything from bookkeeping and financial reporting to cash flow management, tax compliance, and financial planning. It involves both the systems you use (like accounting software) and the people you hire (in-house staff or external accountants) to keep your financials in check.
If you’re not investing in this area, you’re leaving your business vulnerable to mismanagement, cash flow shortages, tax penalties, and even insolvency. The good news is that by dedicating a modest percentage of your revenue to finance, you can ensure stability and growth.
Here’s why setting aside 1.5-2.5% of your turnover for finance is a smart move:
1. Accurate Financial Reporting: You’ll always know the financial health of your business, allowing for informed decision-making.
2. Cash Flow Management: Avoid cash flow shortages, plan for growth, and respond to financial emergencies with ease.
3. Compliance & Tax Efficiency: Stay ahead of tax regulations and avoid fines, while also taking advantage of potential savings through tax planning.
4. Risk Management: Strong financial controls help detect fraud and mitigate risks before they become major problems.
5. Better Business Valuation: Accurate and timely financials improve investor confidence and can lead to better business valuations.
Let’s dive into a few real-world examples from clients who came to us after underinvesting in their finance function. These stories highlight the consequences of ignoring this critical aspect of business management:
A landscaping business joined us without up-to-date bookkeeping and was behind on VAT payments to HMRC. Constantly taking out loans to stay afloat, they had a net profit of just 3%. Once we got their financials in order, they were able to benchmark against industry standards. With adjustments to their pricing strategy, they saw their profit margins skyrocket to 20% net profit and 50% gross profit.
Another client, a therapy business, had racked up £300,000 on a company credit card, but due to poor bookkeeping, the debt was misclassified as a director’s loan. This mistake resulted in a £60,000 corporation tax liability and potential personal tax bills of over £110,000. We quickly reclassified the transactions and put better controls in place to prevent future issues.
A holiday letting company we worked with had completely omitted a bank account from their financial records, resulting in nearly £100,000 in undeclared sales. Not only did this put them at risk of HMRC penalties, but it also meant their business performance appeared much worse than it actually was. After correcting the records, we helped them avoid penalties and gave them a clear view of their true financial health.
A software company led by a sole director was paying the director a salary of £120,000 a year. By restructuring this into a salary-dividend combination, we helped the director take home the same amount but saved over £15,000 a year in taxes.
One of our most challenging cases was a financial comparison service. They hadn’t realised that VAT rules applied to their business, leading to a historic under-declared VAT bill of over £250,000. The company’s business model was no longer viable, and profitability had shrunk to just 5%. Through a strategic planning session, we helped the director restructure the business, reducing turnover from £4 million to £1 million. The business has since recovered, now operating with 15-20% profit margins.
These examples illustrate how underfunding your finance function can lead to major issues—missed tax payments, poor financial performance, and even cash flow crises. By investing a small percentage of your turnover in financial management, you can avoid these costly mistakes and position your business for sustainable growth.
Think of your finance function as the foundation of your business. Without it, everything else could crumble. Make sure you’re building on a strong foundation by investing in the right systems and expertise to support your financial health.
If you’re concerned about your company’s financial health or want to improve how your finance function operates, we’re here to help. Contact us today to learn how we can get your business on the path to financial stability and growth.
