Managing your baking business finances
Let’s talk about money! When it comes to running your bakery or home baking business money can be one of those things you think about last either because it’s scary, overwhelming or you just find it boring. Unfortunately, having a handle on your finances is an essential part of being a business owner BUT it doesn’t need to be complicated or scary…I can’t promise it won’t be a little bit boring though.
You can create your own tracking system by hand, use spreadsheets or accounting software but having some kind of system in place is important. If you hide from the numbers in your business you won’t be able to create income goals and you can slow your growth as a new business.
The numbers you need to track in your bakery
Let’s first look at what you should be keeping track of when it comes to money in your business.
Expenses
Tracking your expenses is important for a couple of reasons. First, you want to know how much it’s costing you to run your bakery, so you can make sure you are making a profit and not losing money. Second, when it comes to submitting your tax return at the end of the financial year, you will need a note of what business expenses you had to offset against your profit and your tax bill.
How I track them:
For online business purchases, I drag all of my digital receipts into a folder, so they don’t get lost or accidentally deleted. For ‘real life’ purchases I keep the receipts all in one place, ideally a folder or ring binder, so they are easy to file and cross-check come tax return time.
Overheads
Overheads are business expenses that are related to the running of your business, rather than your tools and ingredients. Things like your electricity, phone and internet, premises. As these are larger numbers it can often be easier to track these on a yearly basis rather than as-and-when. This is particularly useful if you are working from your home kitchen. You can then take a percentage of your bills and assign them to your business.
Income
Income is obviously a very important metric to be tracking in your business and it’s surprising how many people don’t keep a close eye on this. If you are using accounting software and a business bank account it will be easy to see what is coming in and out but either way, I would recommend having a list of your customers/orders and what the order amount was.
How I track this:
As I mentioned above, using accounting software for your invoicing is the easiest way to track your business income, but a simple spreadsheet with the order name, date and amount will work just as well.
What money you should set aside in your baking business
Tax & National Insurance
Setting aside a percentage of your income at the end of each month for your tax and national insurance (or any other income-based charges you need to pay in your country) will save you a lot of pain when it comes time to pay your bill! I’m in the UK where income tax starts at 20% so each month I move 20% of my income into a separate bank account for my end of year bills.
Profit
There is a brilliant business finance book called Profit First which encourages business owners to first set aside their profit, their own salary, tax and what’s left is for your business expenses. The logic is that we spend what we have. So if you have £500 in your account, you will spend £500. Whereas if you have only £250 in your account you will still make it work but you’ll be more efficient. In the early days of your business, you can set aside a small percentage of your income as ‘profit’ which can be for an end of year bonus, new equipment, a safety net or just a treat!
My favourite tips for managing your money
Business account
Having a business account is one of the first things I would recommend doing when you start your business. It’s so easy and cheap to do and it will immediately make you feel like a professional and in control of your business finances.
Set up standing orders to pay yourself
When you are in charge of your own money and paying yourself it can be very easy to let this slip and just live off whatever is left in your business account. I recommend setting up a standing order from your business account to your personal account to pay yourself a set amount each month. This will encourage you to run a lean business and not waste money and will also give you that boost each month when ‘pay day’ rolls around!
Pick a date at the end of the month to divide up your money
Get into a habit of going through your money each month to make sure everything is up to date, all of your receipts are filed and your money is assigned to the right place.
Create separate accounts
Earlier I spoke about paying yourself, profit and tax. I like to keep as much control over this as possible by having separate accounts for each. I have one business account where my money is deposited from customers. I also have a tax account so the money set aside for tax is separate and can’t be accidentally spent. I have another account for my profit, for the same reasons, and my personal account is completely separate from all of them.
My favourite baking business finance tools
Spreadsheets
You can use Excel, Numbers or Google sheets to create spreadsheets to track everything we spoke about above. (Check out Cake Pricing Plus if you’re interested in spreadsheets for your bakery!)
Paper
Nothing wrong with doing it all by hand! It might take a little more effort but the key is to track everything so you do it whatever way is easiest for you.
Accounting software
I use an accounting software called FreeAgent (as recommended by my accountant brother) and it’s really helped me to keep on top of my finances. Other options are Xero (which has a free plan) and Quickbooks
The finance paperwork you need for your customers
Invoice
Sending your customers invoices is an easy way to keep track of your income and to make your business appear professional. It can also make payment easier by linking it to your bank account or PayPal. This means people can pay you upfront, quickly, and remotely. It also leaves a paper trail that can help protect you from any claims from your customers.
Receipts
Acknowledge payments from your customers with a receipt. If you’re using software to issue invoices the receipt will usually be auto-generated but a simple email or written note confirming you received payment is all that’s needed.
Wrap up
The most important part of dealing with the money in your bakery is to not hide away from it and to always know exactly where you stand financially. In the early days when you don’t have much coming in it can be a bit uncomfortable, but it will definitely pay off in the long run. Getting into the habit of using accounting software and spreadsheets to track every penny within your business will set you up for financial security and success in the future!
