Finances for Small and Micro Businesses Don’t Have to Be Scary or Complex 

After a long career with EY and leadership positions in SMBs, I decided to set up my own small business and quickly realised that a career in the corporate world doesn’t prepare you for small business life. You have to handle everything yourself. Sorting through countless tools, I soon saw that I didn’t need a bazooka to kill a mosquito.

Small businesses generally run their finances, HR, and operations with a “Swiss army knife” admin person, but these multi-taskers aren’t great at handling financial management.

Managing finances is often seen as the most daunting aspect of running a small business. The intricacies of accounting practices, compliance demands, and potential penalties make it easy to understand why many small business owners feel overwhelmed and sometimes delay these tasks. This can also be attributed to avoiding something perceived as boring and not part of the core activity.

While all this rings true, how do you stay on top of your finances without breaking the bank or burning the midnight oil?

Elon Musk would say, break anything difficult down to its first principles. So, let’s break down a micro-business’s accounting process into just six basic steps:

1. Sales and Invoicing. Generating accurate invoices and tracking sales is fundamental to maintaining your revenue stream.

2. Expenses and Purchases. Keeping a meticulous record of expenditures is crucial for monitoring the financial health of your business.

3. Payments and Receipts. Efficient handling of incoming and outgoing payments ensures the business maintains a healthy cash flow.

4. Bookkeeping. Regular updates to the profit & loss statements, balance sheets, and cash flow statements are essential for a clear financial overview and ensuring compliance.

5. Tax Compliance. Awareness and adherence to tax obligations prevent legal complications and potential fines.

As long as you are on top of these steps, you can rest easy that the basics are covered.

Then, the below will ensure peace of mind and enhance your ability to fully understand your business.

Keep Personal & Business Expenses Separate

Many small business owners, especially single owners, treat their business as an extension of themselves. The tendency to mix personal and business expenses is common. We’ve seen quite a few Zara bills on many a client.

Discipline is necessary, especially with the corporate tax coming. Many expense categories are not fully reimbursable or may even be disallowed.

It’s a good practice to maintain a corporate bank account even if you’re just starting. New-age banks such as Wio were established to fill the gap in the market where ultra-small businesses without an office and adequate turnover can maintain a proper bank account.

Keep Records

While the FTA doesn’t require you to use software, it is important to maintain records for five years, and software can help. Popular options like QuickBooks, Zoho, and Xero offer relatively inexpensive subscriptions from AED 65-75 per month.

Importantly, assess what’s best for you instead of picking software because of a freebie like a free licence for a year.

You could also adopt something like Paci.ai, which defines itself as software with a service. Each subscription comes with a dedicated accountant, ensuring last-mile finance management. This means all you have to do is drag and drop your documents— invoices, expenses, receipts, and bank statements. Paci’s software ensures all entries are classified, categorised, and tallied, and taxes are filed.

Track Important Numbers

Many small business owners know their numbers off the back of a napkin, but it’s still imperative to track important numbers, especially cash flow.

While this differs from industry to industry, keep an eye on the basics: income, expenses, profits, cash flow, top customers, top expenses, top income contributors, and trends. This ensures not only basic health checks but can also act as a catalyst for growth.

Review Financials

Understand the holy triumvirate of the income statement, balance sheet, and cash flow. While many businesses understand the income statement or profit & loss statement, small businesses often overlook the balance sheet and cash flow.

A balance sheet is crucial as it outlines the state of a business at any point in time. A cash flow statement provides details on the sources of cash for the business, usually from three sources: operating activities, investing activities, and financing activities.

Keep an Eye on Compliances and Their Potential Penalties

ESR for small businesses ensures that you engage in substantial activities in your jurisdiction. Relevant activities under ESR include banking, insurance, investment fund management, lease finance, headquarters, shipping, holding company, intellectual property, and distribution and service centres. These categories must demonstrate substantial activities as defined by regulatory authorities. Typical penalties for omissions and errors mean having tighter oversight or additional help with finances is worthwhile.

Table: Typical Penalties

Nice to Have: Budgeting

Consider how every change in expenses or income will trickle down to your budget. Hiring a new employee doesn’t just mean another salary; it also translates to changes in payroll taxes, benefits, and other expenses.

Ensure you’re budgeting for all expense categories, including fixed, variable, and emergency expenses. Anticipating these costs can help you balance your business budget and plan ahead. View your business budget as a living document. Financial circumstances change, and the unexpected happens. Review your financial statements regularly, reconsider your costs and spending, and refine your business budget as necessary.

Set goals but avoid wishful thinking. Use your bookkeeping records to determine what might transpire over the next month, quarter, or year. Ultimately, it’s better to be conservative with your budget than to expect the best-case scenario.

Make Technology Your Friend, but not a Crutch

Follow the KISS (Keep it Simple, Stupid) principle. With numerous tools like accounting software, banking apps, payment gateways, CRM software, expense cards, e-commerce stores, and super apps, it’s tempting to automate everything. However, this can create a false sense of security and lead to ballooning costs after the trial periods end.

Keep it simple, understand your core activities, and use a tool stack that does enough and does it well.