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When you run a business, one of the first things any of your advisors will tell you to do is always separate your business finances from your personal ones. There is a very good reason for this. As any Director should tell you, a limited company is a legal entity, so actually, the company money isn’t yours to take. If you are a partnership or sole trader, it’s only sensible to keep things clear financially. However, while personal and business finances may well be separate on paper on a day-to-day basis, they can influence each other.
When it comes to your personal financial wellbeing it’s important to be looking ahead to the coming year and asking yourself if you have fully accounted for the potential impact it may have. We are all aware of the impact inflation has had on our monthly bills, but what about the less immediate costs? What effect will they have on you, and your business?
Insurance is a good example of one of the annual bills that are currently taking people by surprise. Ask anyone who has recently renewed their car insurance and they will probably have a tale of woe about how much it cost. In fact, according to Confused.com, during the third quarter of 2023 (July-September), drivers paid 58% (£338) more on average than a year ago and, for more perspective, the typical cost of annual car insurance in 2023 is £924 as compared to £514 in 2021. Ironically this may partly be down to the cheaper to run electric vehicles which have a higher repair cost and therefore demand a higher premium. Maybe one will offset the other, but whether this will balance out overall is not really the point here. From a budgeting point of view an unexpected insurance bill that has increased over £400 in 2 years is a hefty hit.
I’m sure I don’t need to tell you that the gas and electric bills have gone up. Most people tend to pay these monthly to spread the cost, but that can lead to a misleading subscription mentality. This is where we tend to see small amounts as less significant than larger annual ones. A streaming service, for example, feels much more affordable at just under £10 a month than it does at nearly £120 for 12 months. When you are considering your utility bills for the coming year, it’s important not to fall into the small amounts trap. After a sharp increase such as the average of 77% (source Office of National Statistics) in Q1 of 2023, it’s easy to see a much smaller increase in a more favourable light. It’s still an increase though, and over the year it could be a significant one. Look at the big picture, not the monthly one when you are budgeting.
Another personal money-related hit is mortgages. It is estimated that around 2.4 million fixed-rate mortgages are coming to an end in 2024. With current interest rates, that could mean a potential £2,900 annual increase for the average mortgage.
Ok, so let’s just take a pause to do a little adding up here. Those three items alone mean a potential increase in your household costs of over £3400 next year. When you consider that these are only some of the likely price rises, you can see why I am a little worried that people are not budgeting effectively.
While you should keep your business and personal finances separate, they do sometimes impact each other.
If domestic insurance costs are rising, so are business insurance costs. You need to expect to be paying more for
· Public liability
· Professional indemnity
· Buildings and content
· Key person insurance
To name just a few.
The cost of utilities is already putting a huge burden on many industries. As with the domestic price rises, the 2024 cost is still going to be high and may well rise further. Transport, and the cost vans and other company vehicles, are going to be more expensive across the board, whether they are owned or leased.
The mortgages and loans that many businesses may have been considering for next year could prove less attractive. That means some companies could find themselves unable to fund expansion or worse still, replace vital equipment.
Finally, one very clear crossover between personal and business finances is salaries. Many directors take smaller wages and rely on dividends. The money simply may not be there next year to pay them. Remember, taking dividends without the profit to justify it could land you in some serious trouble if your company heads into insolvency. But it’s not just the board level wages that could be the problem. Your workforce will also be feeling the pinch. They may well look to their employer for a wage increase to match inflation and then go to one that can if your business is not in a position to do so.
There is no point in dressing it up, 2024 is going to be a rough financial ride both personally and in the business world. What really matters right now is to budget and budget hard. Be realistic about what your personal and business finances will look like next year and do whatever is needed to make things work.
If you think your business isn’t going to get through the coming months and you need our advice about insolvency or recovery options, book a free consultation by clicking here.
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